Investment choice is a key feature of self-managed super funds (SMSFs) and is usually one of the main drivers behind their establishment.
The ability to invest in different asset classes, acquire a piece of art or even acquire a direct interest in a property – the investment options are certainly diverse. As is the way in which these assets can be acquired and then held.
Over the years there have been significant changes in the way both listed and unlisted investments can be accessed and managed, with the introduction of new investment products, platforms and markets.
One relatively new way to gain exposure to investments is through mFund. These funds allow investors to buy and sell managed funds using the same electronic processing system the ASX uses to settle share transactions.
Background to mFunds
Managed funds have been available in the Australian market for decades and provide a style of investing familiar to most investors. In many cases, managed funds offer a cost-effective way to access a range of underlying investments and provide diversification that may not otherwise be possible.
Like shares, investors can buy and sell units in mFunds through their stockbroker or online broker.
This eliminates the need for lengthy application forms for purchases, or withdrawal forms when it comes time to sell units in the managed fund, providing a smoother and more timely investment process.
The mFund marketplace
The ASX mFund website lists over 200 different managed funds offered by many well-known fund managers both in Australia and overseas.
These mFunds cover a wide range of asset classes including International and Australian equities, property, fixed interest and mixed-asset-style funds.
There are also sector specific funds and others that specialise in certain geographic regions.
The ASX promotes mFund as the new way to access managed fund investments, with the following benefits:
- “Access to a broad range of managed funds through a central hub and through an ASX stockbroker, adviser or accountant relationship
- Potential to enhance returns through exposure to a wider range of asset classes and by accessing the services of professional fund managers
- Easier transaction and administration of managed-fund investments, including the ability to use an existing stockbroking account to access managed funds
- More timely access to a wider range of information about managed funds, including unit prices and related announcements
- Same high level of settlement certainty investors enjoy with shares
- A holistic view of investments held through ASX under a single CHESS HIN
- Easier to change between unlisted managed fund investments
- Easier to see the value of an entire portfolio using investment administration software tools.”
MFunds also carry the same risks as managed funds in general. Risks include:
- Underperformance – returns from actively managed funds may periodically lag their relevant index or benchmark.
- Currency risk – a fall in the Aussie dollar will increase the value of investments held in other currencies, while a rising dollar will decrease their value.
- Fund-specific risks – some managed funds may use borrowing (leverage) or derivatives, which can increase risk (and returns).
- Emerging market risk – certain countries or regions may be subject to higher degrees of market volatility and economic and political instability.
Adviser insight into mFund
I recently spoke with Karl Brooke CFP, a financial adviser from the central coast of NSW, to talk about mFund and how SMSFs can invest using this service.
Can you explain mFund to our readers and how they operate?
Karl: An mFund is an unlisted managed fund that is settled on the ASX. They offer an actively managed portfolio across a range of asset classes that may outperform or underperform the market.
They therefore contrast with the passive index style of most exchange traded funds (ETFs).
mFund units are traded through your stockbroker, adding a simpler way to buy and sell the fund, without the need to use an investment platform.
Does mFund provide any unique opportunities or outcomes and how do they fit into an overall SMSF investment strategy?
Karl: Absolutely. mFunds can provide Australian investors with access to investment opportunities that are not accessible via investing in direct shares.
These include professionally managed funds across a range of asset classes including bonds, infrastructure and alternative investment options.
mFunds can provide an effective way to manage diversification or strategic asset allocations by using just a share trading account.
This can be achieved through buying or selling units in the relevant mFund via your broker.
If I want to invest in mFunds, how do I go about it?
Karl: Your first step is to check if the stockbroker that you trade through supports mFunds.
Once this has been confirmed your next step is to select the mFund that you would like to invest in and gather the mFund’s ASX code. From here the process is similar to buying Australian shares in that you need to place a purchase order.
Please note that a slight difference is that your purchase price is set at the mFunds entry price and that you are not buying or selling units directly with other investors.
What alternatives are there to mFunds?
Karl: Alternatives for investors looking to add diversification to their share portfolio include listed investment companies (LICs) and exchange traded funds (ETFs).
Like any investment, investors need to understand some of the unique characteristics of these instruments before investing.
For example, unlike mFunds, LICs often trade at a price significantly higher or lower than the net asset value of the underlying portfolio and each structure has different tax consequences.
Do you use mFunds for your clients’ investments?
Karl: Yes, we use mFunds in limited circumstances where appropriate for our clients; they are a great way to add diversification to an existing share portfolio without the added cost and complexity of a platform.
They have the added benefit of always exchanging at net asset value.
However, mFunds tend to be more expensive than their index ETF-style counterparts, have higher minimum trade values and may be slow to settle.
Investors with lower balances should be mindful of the mFund minimum investment requirements. While several are accessible with a few thousand dollars, a majority require an initial investment of $10,000–$25,000.
When redeeming mFunds, investors should also be aware that their funds will take longer to convert to cash than shares typically take to settle.
Karl Brooke CFP is an authorised Representatives of BD Financial Advisory.