Active exchange traded managed funds – the basics
An active exchange traded managed fund is, most simply, a managed fund that is traded on a stock exchange such as the ASX. They are built like managed funds, but trade like shares, meaning that pricing is transparent and they can be bought and sold during any trading day just like ordinary shares.
Active exchange traded managed funds share many similarities with exchange traded funds (ETFs) but have one key difference: ETFs are “passively” managed and aim to track a particular benchmark or index, whereas exchange traded managed funds are “actively” managed by fund managers with the aim of outperforming a relevant benchmark.
The global market
Exchange Traded Products (ETPs), which include ETFs and other exchange tradeable funds, are one of the fastest growing categories of investment products in the world, with over US$3.1 trillion of assets held in over 6,200 products globally1. A key reason for their popularity is that they exhibit all the advantages of stocks, such as being easy to trade and liquidity, coupled with the benefits of managed funds, such as diversification.
The Australian experience
The Australian ETP industry, while comparatively small on a global scale, has grown dramatically over the last few years. As the chart below shows, the total market capitalisation of all ETP assets has grown from around $5 billion in May 2012 to over $23 billion in May 2016.
Australian ETP Market Cap: July 2004 - May 2016 (A$m)
Source: BetaShares Australian ETF Review May 2016. CAGR = Compound Annual Growth Rate
This growth is expected to continue as Australian investor awareness of ETPs increases and as continued product innovation takes place. Exchange traded managed funds are at the forefront of this innovation.
How they work
Like ETFs, exchange traded managed funds are open-ended. This means that, unlike a typical company that lists its shares on the market (including LICs), should investor demand exceed supply, the exchange traded managed fund has the ability to simply create more units to meet the demand. Similarly, units can also be cancelled should supply exceed demand.
Exchange traded managed funds differ from ETFs, however, in that the fund itself acts as market maker, rather than relying on third party market makers. This means that each exchange traded managed fund, rather than third parties, will set bids/offers for investors on market during the trading day.
Third party market makers facilitate pricing and trading on the market for ETFs because ETFs, being index tracking funds, disclose their full portfolio on a daily basis. As such, third party market makers can accurately calculate the true value of the ETF (or net asset value (NAV)) and set bids/offers accordingly. For active fund managers, the composition of their portfolio is their key intellectual property and can’t be continuously revealed to the market; otherwise other parties could replicate their portfolios. Hence, the exchange traded managed fund itself acts as market maker, with the full portfolio only disclosed to the market quarterly, with a lag of up to two months. This protects active fund managers and the fund’s unitholders from conduct such as “front-running” and prevents replication.
As self-market maker, exchange traded managed funds provide available bids/offers on market that reflect the fund’s view of “fair value”, as referenced by the indicative net asset value (iNAV), market conditions and the supply and demand for units during the trading day. At the end of each trading day, the fund will then issue or cancel units according to its net position in units bought or sold on the ASX on that day, and any gains or losses from the market making process will accrue to the fund.
For investors looking to trade, the fund acting as market maker will be available on the other side of the trade willing to buy/sell units. This is different from shares in listed companies and LICs, which are traded between Investor A and Investor B only. With an exchange traded managed fund, units can be traded between Investor A and B, or in cases when there is no Investor B, the fund as market maker can be expected to be “on screen” to buy/sell directly to Investor A.
How they are bought and sold
Transacting to buy or sell units in an exchange traded managed fund is done through any full service or online broker, just like buying or selling a share or an ETF. As always investors should remember to read the Product Disclosure Statement (PDS) of each exchange traded managed fund prior to investing.
Find out more about AMP Capital's active exchange traded managed funds - Learn more here.
About the author
Paul Gambale is Senior Product Owner - Innovation and New Ventures at AMP Capital
1Source – ETFGI.com, as at end April 2016.