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Listed Investment Vehicles – What is the investment structure of the future?

As the range of investment vehicles available has increased, the choice of investment structure for investment managers is no longer straight forward. 

Investment managers now need to consider multiple business and investment related factors when making product development decisions and choosing between Managed Funds, Managed Accounts, Exchange Traded Funds (ETF’s), Active ETF’s, Listed Investment Companies (LIC’s) and Listed Investment Trusts (LIT’s).

For active managers looking to expand their distribution reach, the choice between Active ETF’s and LIC’s (or LIT’s) has become a key ‘fork in the road’ product strategy decision with a spike in launches of both types of structure occurring in recent times. So what has been the experience in the Australian market to date, what has been successful and what can we expect to see in the future? Is this a VHS versus Betmax battle of standards or will both structures continue to coexist?

 

Recent Trends – does slow & steady doesn’t win the race?

If we take a look at recent history, according to ASX data there were nine new Active ETF’s launched by seven separate investment managers in the year ending 30th September 2018, raising $405m in net flows. In comparison, 12 new LIC’s were listed during the corresponding period raising $4,360m in capital, including approximately $1.6b raised by the Magellan Global Trust (an LIT which has been grouped with LIC’s for the purpose of this analysis).

 

 Net Inflow

Figure 1 – Net Inflow/Capital Raised: 1 October 2017 – 30 September 2018    
Source: ASX Investment Products Monthly Update (2017-2018)

 

Given the similar increase in product numbers, the main reason for the difference in assets raised between the two structure types is due to the inherently larger amounts of assets raised upfront in the LIC IPO process and the strength of the broker distribution network. The average net flows for new Active ETF’s launched during the year equated to $45m per product, compared to an average LIC capital raising of $363.3m.

Does this mean that LIC’s are the clear winner when deciding which listed investment structure to choose? Well, not necessarily for the following reasons:

  • these figures don’t factor in the open-ended nature of Active ETF’s (with further positive net flows expected from the recently launched products into the future), nor that five of the new Active ETF product launches occurred in the second half of the period;
  • the higher average LIC figure across 2017/18 is due in part to the success of Magellan, which has also had considerable success in the Active ETF space having effectively defined this market since 2015. Excluding Magellan’s LIT from the analysis results in an average capital raising for the year of $251m, which is comparable to the average assets under management (AuM) of the top 10 Active ETFs;
  • Over the past three years Active ETF’s have achieved a cumulative annual growth rate (CAGR) in AuM of 51.6% p.a. (albeit off a low base), compared to a CAGR of 14.9% p.a. for LIC’s (see figure 2 below).

 

 Growth in Active ETF

Figure 2 – Growth in Active ETF’s & LIC’s             
Source: ASX Investment Products Monthly Update (2015-2018), Shoreline analysis

             

Investment Strategy – follow the money

Given the activity around investment structures and new product launches, which strategies have been successful in raising assets?

The short answer is global equities, with 67% and 52% of new capital for Active ETF’s and LIC’s respectively being allocated to global equities.

  

 New Active ETF

Figure 3 –New Active ETF & LIC Net Inflows by Investment Strategy (1 October 2017 – 30 September 2018)
Source: ASX Investment Products Monthly Update (2017-2018), Shoreline analysis

 

Of the top 10 Active ETF strategies by AuM, five are global equity strategies (equating to 64% of Top 10 Active ETF’s by AuM), with the remaining strategies comprising 3 Australian equity, 1 Infrastructure and 1 Australian fixed interest strategy.

 

 Top ETF

Figure 4 – Top 10 Active ETF’s by AuM (as at 30 September 2018)     Source: ASX Investment Products Monthly Update

 

We believe the bias towards global equity strategies can be attributed in part to self-directed and more sophisticated investors seeking:

  • Easy access to an investment vehicle that will enable them to invest in markets which are more difficult to access themselves;
  • Professional investment management expertise and research coverage in an asset class where investors are less familiar with the underlying assets;
  • Investment solutions to complement their existing Australian equity holdings.

Investment managers launching Active ETF’s or LIC’s need to consider the ability of their chosen investment strategy to meet these investor needs, whether it is global equities or a different asset class.

 

Looking Ahead – expected developments over the next decade

Whether Active ETF’s or LIC’s will be the dominant investment vehicle of the future depends on a number of inter-related distribution dynamics, specifically:

  • Strength of broker distribution and the continuation of brokers providing more funds management services;
  • Continued growth in self-directed investor segment;
  • Rise and evolution of non-traditional investment platforms and digital advice solutions driven by technology;
  • Growth in multi-asset managed account solutions utilising listed vehicles for asset class exposure.

While LIC’s will remain a significant investment vehicle in the future given their ability to raise significant amounts of capital through IPO’s, we expect that over the next 10 years Active ETF’s will continue their strong growth and become the listed investment vehicle of choice for active managers due to their ability to:

  • provide an investment structure suitable for both self-directed and traditional adviser distribution channels;
  • efficiently form part of a multi-asset managed account portfolio or digital advice solution, both of which are expected to grow significantly in the coming years;
  • minimise issues surrounding divergence from NAV, liquidity risk and capital raising costs when compared to LIC’s.

 

Like to know more?

Shoreline’s Product Advisory Services practice specialises in providing product strategy, market analysis and product development services to asset and wealth management clients.  For further information on how Shoreline can assist your business, or to discuss investment structure trends in more detail contact Dale Rowley, at our Melbourne office.

 

Dale Rowley

Associate Director

 

 

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