Managers queue to catch the quoted funds wave
Loftus Peak, Australian global equities boutique, has become the second manager to launch a “quoted managed fund.” This looks set to become a strong trend in retail distribution, with a host of managers lining up for the new form of listing and an extra administrator entering this part of the market, Link Fund Solutions.
The quoted managed fund concept was pioneered by Magellan Group for its Airlie Funds Management subsidiary, acquired in 2018. It was launched in February this year, with its administrator, Mainstream Fund Services. Alva Devoy, managing director of Fidelity International in Australia, also spoke at that launch and said her firm was looking to be part of the next stage of development for the industry, following mFunds and active ETFs.
Magellan was also one of the pioneers of active ETFs, which have improved trading over the end-of-day-only trades of mFunds, but still require two structures and two registries for the same fund. This means significantly higher costs to get the benefits of market listing.
Magellan is in the process of its unlisted global fund acquiring its active ETF and listed investment trust (LIT), which will make for one fund with a separate registry. For investors, because of the market-maker, there will no longer be the problem of the LICs’ shares often trading at a discount to the value of their underlying investments, which has increasingly been seen as an issue for the managers, too.
Nick Happell, Mainstream Fund Services chief executive for Asia Pacific, said there were currently six more quoted managed funds in its pipeline, following the listing last week (November 9) of Loftus Peak’s top-performing global disruption fund. One of them will also be using Equity Trustees (EQT) as its responsible entity (RE), as did Loftus Peak.
Another, which is expected to become a Link Fund Solutions quoted managed fund client, is Contango Asset Management. Neither Marty Switzer, Contango’s managing director, nor a Link spokesperson was able to comment on the manager’s plans last week.
While the concept of a quoted managed fund is simple, there are several moving parts in the process. The fund manager chooses and appoints an RE, such as EQT, and the RE in turn appoints the fund managers, the administrator and unit registrar, custodian, market maker and iNAV provider – all in discussion with the manager, which pays the bills and acts as the other party for buying and selling by the market maker.
Loftus Peak was formed in 2014 by Alex Pollak, the CIO, and joined by Rick Steele and other friendly parties including Paul Davis, an entrepreneur based in Port Levy on New Zealand’s South Island, who previously worked with Steele at TechInvest. TechInvest, itself formed during the heady days of the dot-com boom in 1998, was effectively folded into Loftus Peak along with key staff. The Loftus Peak fund was launched in 2016.
Martin Smith, Mainstream’s global group chief executive, said back in February that the Airlie fund initiative was “like an Uber moment” for the industry. He predicted that other managers and administrators would possibly catch up within about three months with their own arrangements. He was wrong about that bit.
The second administrator to enter this new market is Link Fund Solutions, which is expected to launch its first quoted fund before Christmas. Link has its own internal registry for listed markets and uses an outsource provider, SS&C’s HiTrust platform, for unlisted. Using two systems may make conversions from HIN (broker stock) to SRN (issuer stock) and vice versa more complicated for ASX listings.
Another manager which is looking to put up several funds as quoted managed funds is Coolabah Capital Investments, which is a long-only and long/short credit manager which already has an active ETF in conjunction with BetaShares. The proposed administrator for the other funds is unknown.
Mainstream’s Happell estimated that by having just one vehicle and one registry for the two forms of distribution – via the ASX or Chi-X and a broker or directly to the unlisted trust via the RE – a fund manager could possibly save between $150,000–$250,000 a year in costs, if it already had the unlisted trust, as will be common. There is a possible further saving depending on the rate scale differences and the fund’s size between Chi-X and ASX.
Mainstream, which has its own registry offering, recently won the tender to provide standalone registry services to Pendal Group, which has about 80 separate funds. Other registry providers include Boardroom and OneVue.
Harvey Kalman, the global head of fund services and managing director, UK and Europe, at EQT says that the main advantage of quoted managed funds is not so much the cost savings from the increased efficiencies as the extra distribution arm for managers.
“The beauty for me is that it allows the opportunity for the investors to trade on their preferred platform, be it the ASX or a wrap platform. There is an additional set of requirements for the manager, though, in complying with ASX rules such as continuous disclosure… This is a no-brainer. It opens you up to another distribution platform.”
Rick Steele agreed that the extra distribution was the biggest benefit for the manager. The manager could take an existing fund and track record and offer a new point of access, he said. He believed investors preferred a fund as a mechanism rather than a separately managed account, using Loftus Peak’s own experience as an example. The manager offers its original managed account service to wholesale investors, with a $50,000 minimum and a fund, whose structure it acquired, with a $5,000 minimum. The managed accounts have about $15 billion–$17 million under management while the fund has about $140 million.
Alex Pollak, whose global disruption fund has produced an annual return of 25 per cent, after fees, since inception, is a journalist-turned stockbroker and banker, who was at Macquarie Group for more than 20 years, most recently as executive director.
He described the quoted managed funds trend as: “A re-opening trade that’s juicing the market, and that’s a good thing… We invest in enablers. We’ve benefited from COVID because we’ve invested in a whole range of services which are disrupting traditional business models… but we’ll be delighted when COVID stops, of course. We want a robust world. We want more sustainable businesses.”
Loftus Peak’s service providers, apart from Mainstream and EQT, are J.P. Morgan, which is sub-custodian to Mainstream as prescribed custodian, Macquarie as market-maker, Solactive AG, a German index provider, for iNAV (which sources its data from the custodian), and which in turn supplies a range of data providers. Baker McKenzie, well known for its expertise in listed investment structures, did the legals.