In September 2014, the ASX launched its new Managed Fund Settlement Service (mFund) initiative. mFund enables investors to buy and sell units in unlisted managed funds through an ASX broker. The service replaces traditional paper-based processes and uses the same electronic system (CHESS) as for settling ASX share transactions. There are many expected benefits for investors, including diversification, efficiency, convenience, and speed.
Expectation of a ‘slow burn’
Ibbotson decided to participate from the start because developing multiple ways to access our products puts investors in control, opening a wide range of professionally-managed investments in a way that works best for them. We’re confident investors will embrace this way of investing in managed funds, enjoying the same paperless investment experience they have with share trading.
The ASX’s marketing strategy is focused towards its large and engaged following of self-directed investors who seek the control and efficiency that mFund has been designed to offer. We consider this channel to be distinct from investors who engage with a financial adviser.
Our expectations are realistic and it’s our belief that mFund will be a relatively slow burn. But what new investment initiative takes off overnight? Managed accounts have been available in Australia for well over a decade, and have only recently gained meaningful traction. It’s a similar story for Exchange Traded Funds.
Ibbotson received flows as soon as the initiative launched, so our initial experience has been positive. We’ve also supported the ASX’s marketing efforts by participating in a national road show with events for both advisers and investors. This was an opportunity to gather valuable information about the type of investors most interested in mFund. This insight will enable us to enhance our marketing and distribution plans to leverage the momentum of the launch.
Sorting out the technology issues
Becoming a foundation member was a learning curve for all involved. From a technology perspective, the key decision was whether to build an in-house CHESS interface based on CHESS open interface specifications, allowing us to act as a Product Issuer Settlement Participant (PISP), or whether to engage with an external service provider to act as our PISP. We chose the outsourcing route, leveraging the existing CHESS interface of our chosen service provider, MainstreamBPO. This reduced the technology burden significantly.
We settled on the sub-registrar model for integrating mFund into our existing operational processes. As part of its PISP role, MainstreamBPO maintains a sub-register of all investors accessing our products through mFund. MainstreamBPO aggregates transactions originating through mFund and pushes these through to our master registry. We adopted this model with little or no disruption to our existing unit pricing and investment administration processes.
We also had to make minor adjustments to the Product Disclosure Statements for the funds offered through the mFund service, as well as implement additional reporting capabilities to the ASX before going live. Future participants will benefit from the issues resolution foundation members have been through with the ASX and the various PISPs.
With brokers responsible for ‘know your client’ checks and our PISP, MainstreamBPO, responsible for processing applications, our role is to invest the application monies. This has not generated hard cost savings, but has produced efficiency gains.
Why are some brokers and fund managers not involved?
As more investors take control of their investments, particularly via SMSFs, they’ll look for easy and cost effective ways to access investment solutions which diversify their portfolios. mFund provides savings for investors, enabling them to avoid wraps and platform administration fees.
It’s stating the obvious that those fund managers with aligned platforms and wraps have not yet embraced mFund. They have an established distribution channel to their target audience, and so are in a position where they can wait, watch, and monitor flows. Similarly, a key determinant of mFund’s success will be the extent to which investors demand the mFund capability from their online brokers.
A bigger pull (or push) factor will be needed to attract these players, which will take time to play out.
Helena Hill is Product and Communications Manager at Ibbotson Associates.