ETFs continue to break new ground

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The ASX has delivered on its promise from a few years ago to build an “investor supermarket” covering not only listed companies but a range of other strategies and opportunities from professional managers. The ETF market, coupled with the expansion of listed investment companies and listed investment trusts, has been its shining glory.

To its credit, having put a lot of time and money into mFund the managed fund purchase and redemption system, which one would have to say has had a disappointing uptake, ASX worked hard on developing improved and new options for managers and investors.

It’s only real failure – with no criticism because it has tried and may well succeed in the future – is delivering a better system for retail investors to buy international shares. The ASX argues that its suite of ETPs already provides popular and cost-effective access to global opportunities. But its smaller rival exchange, Chi-X, in association with Deutsche Bank, appears to have achieved the goal of better direct access to international markets with its new TraCRs offering, which mimics all the attributes of a direct purchase of US shares at a fraction of the cost.

Rory Cunningham, ASX senior manager of sales and product development, said when presiding over a traditional ‘bell-ringing’ ceremony for the latest ETF last week, that 29 ETFs had been listed this calendar year, taking the total to 186. There were now more than 500 managed funds, in various guises, accounting for more than $800 billion, available through the ASX system.

The latest one represented another milestone. It is the first actively managed fixed income fund on the traded market, launched under the Legg Mason and BetaShares joint venture. It is the pair’s third ETF together.

Western Asset, a Legg Mason affiliate manager, is the underlying manager of BNDS – the domestic fixed income strategy, which is a relatively defensive portfolio that aims to beat its index, the Bloomberg AusBond Composite O+Y TR AUD benchmark) over rolling three-year periods and after fees. It does this through active interest rate management, sector allocation and securities selection.

The Western strategy, overseen by Melbourne-based Anthony Kirkham, head of investment management and Australian operations, has, in fact, beaten that benchmark in each of the last one-year, three-year, five-year and 10-year time periods both gross and net of fees.

Kirkham said at the bell-ringing ceremony that some investors still thought that hybrids (convertible into shares) and similar investments represented core fixed income allocations, but they did not provide the same negative correlation to equities and, in some cases, did not even provide capital protection (during risk off environments).

“Having an active manager can allow them to navigate their way through the index where the largest weighting will be to the most indebted [company in the case of credit or government body in the case of other bonds].”

He said: “We have clients in 36 countries and manage portoflios in 17 different currencies. Our investment philosophy is one we have been using since inception [in 1971, becoming a Legg Mason affiliate in 1986], which is a long-term value approach and diversified strategies.”

Western has a six-member team in Melbourne, which also draws on the US firm’s global expertise of 129 investment professionals to assist in formulating macro views and help perform bottom-up credit research. It has A$26 billion under management in Australia and A$582 billion worldwide.

Kirkham said that sector allocation was an important value-add, influenced by investor flows as well as valuations. Security selection was equally as important, he also said. “Broadly, investor concerns over market fundamentals have increased (recently) and they have a common theme of uncertainty. In uncertain markets, BNDS adds a defensive element to a portfolio and increases diversification.”

Western’s portfolio for the ‘BetaShares Legg Mason Australian Bond Fund’ (managed fund) – ticker: BNDS – is currently underweight government and semi-government bonds compared with the index and overweight corporate investment grade debt. Within the credit sector it has a short dated and high quality bias, preferring to avoid securities further out the risk curve.

Andy Sowerby, Legg Mason’s managing director in Australia and New Zealand, has been on an aggressive growth path for the firm since he took over in Australia in 2016, especially in the wholesale and retail markets. He had previously been the global head of sales and marketing for Martin Currie Investment Management in Edinburgh, which became a Legg Mason affiliate in 2014.

Sowerby said that it had taken a few years to get the latest active ETF to the market. There had been flows in excess if $1 billion into passive/smart beta fixed income ETFs on the ASX this year, but most individual investors were still materially underweight fixed income. When it was developing its listed footprint Legg Mason looked at two key themes being how investors needed to access sustainable earnings and dividends and, secondly, how they needed diversification and access to proven active management expertise. The other two Legg Mason/BetaShares ETFs are both equity income funds, launched in February this year with the central goal of delivering high, sustainable and growing income streams.

Also in February, the firm launched a retail offering in New Zealand, known as a PIE (portfolio investment entity) fund, which is a global opportunistic fixed income fund with another of its nine affiliates, Brandywine Global.

For BetaShares boss Alex Vynokur a bell-ringing ceremony is commonplace. He was at the ASX earlier this month to launch his firm’s 50th ETF, the ‘BetaShares Global Quality Leaders’. BetaShares both partners with managers and has its own ETFs.

He said the ETF market was evolving in the both the active and passive strategies on offer. “We want to partner with high-calibre active managers alongside delivering our own passive strategies,” he said. “Fixed income is a very interesting asset class. When we started out eight years ago the vast majority of investors spoke only of term deposits in terms of fixed income management. We realised that no one solution would be perfect. There’s a lot of complexity in this asset class and Western and Legg Mason are very good educators. This ETF is also the first fully transparent active fixed income ETF which discloses its holdings on a daily basis.”

– G.B.

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