Investors are increasingly “doing it for themselves” as the popularity of direct investing continues to increase through the growth of self-managed superannuation funds.
The latest analysis by research house Lonsec found a significant growth in the number of investments catering to direct investors during the past year.
“Given the average self-managed super fund has almost a third of its assets invested in Australian shares, it’s logical there should be a strong increase in the type of products aimed at these investors,” Lonsec senior investment analyst Peter Green said.
“This surge of interest has seen a sustained rise in new Listed Investment Companies, Exchange Traded Funds and Separately Manage Accounts, primarily driven by greater demand from direct investors,” Mr Green said. Lonsec has also provided ratings for 26 new Australian equities products in the past 12-18 months.
In particular, there has been a number of initial public offers for LICs, which reverses the recent trend within the sector. LICs had experienced a long period of little, if any, new offers as most companies have traded on the market at a discount to net asset value in the period following the global financial crisis.
However, strong returns from the Australian market and renewed interest in direct investing has seen LICs regain their trading premium and popularity, leading to a new round of IPOs, Mr Green said.
“Lonsec Research has recently been involved in substantial research of this sector, including the select rating of three new LICs (QV Equities, Perpetual Equity Investment Company and the soon to be listed Wealth Defender Equities). We expect several more niche offerings in the next 12 months while the IPO window remains open,” Mr Green said.
Exchange Traded Funds have experienced rapid expansion in Australian in recent years with more than $16 billion in funds under management.
“We are seeing strong product innovation in this area and we expect Australia to follow the US trend with even further growth and expansion ahead,’’ Mr Green said.
Separately Managed Accounts are also one of the fastest growing direct investment products. They allow investors, and their financial advisers, to invest directly in a portfolio of shares but with less administration compared with individually owned shares.
“SMAs have been gradually increasing in popularity in Australia during the past decade, however they have a long track record in the US market,’’ Mr Green said.
“They are basically the next evolution of trading platform, which share some of the benefits of a master trust yet allow investors to by-pass the managed fund structure and own the portfolio directly in their own name,’’ he said.
Pros and Cons
Listed Investment Companies
Strengths
- enhanced corporate governance due to separate board and need to meet ASX-listing rules
- greater discretion of directors to manage dividend payments among other capital management initiatives
- stable capital structure
- ease of access via ASX
Weaknesses
- potential to trade below net asset value of underlying portfolio
- can be locked in to long term management agreements
- smaller LICs may have liquidity concerns
Exchange Traded Funds
Strengths
- simple strategy and good transparency of portfolio holdings
- lower management fees then managed funds
- product designed to trade at or near net asset values
- ease of access via ASX
Weaknesses
- “market making” is complex
- can include some overly exotic products
- bid/ask price spreads can be volatile and vary between products
Separately Managed Accounts
Strengths
- usually provide greater tax efficiencies compared with managed funds
- individual investor own their underlying portfolio
- full transparency of underlying investments and performance
- more direct dividend distributions compared with managed funds or ETFs
Weaknesses
- can only be accessed ‘on platform’
- a number of new managers may carry additional business risk
- increased “execution” risk
- tend to be lower turnover and more concentration in fewer stocks