The funds management industry is about to be disrupted in a major way as an increasing number of fund managers look to release products as exchange traded product (ETP), instead of as unlisted trusts.
ETPs are potentially stickier money for funds managers but they are not a method of distribution available to all, with only those fund managers that have the right kind of capital and resources able to choose this route.
This could result in a major shakeout of the funds management industry as we know it, according to Rainmaker head of investment research John Dyall, with smaller boutique fund managers struggling if they cannot partner with a larger organisation.
Eye on the ball
Dyall started collecting detailed information on ETPs on the Australian Stock Exchange (ASX) six years ago and has noticed some interesting changes during that time. The ASX reports very detailed information on ETPs every month which makes it a very measurable product type.
“What you’ve seen in the recent period over the last 18 months, a lot more active managers have entered the ETP market,” Dyall says.
Rainmaker’s quarterly report on ETPs found that in the December quarter of 2020, the proportion of managed funds rose from 9 per cent of the total ETP market to 20 per cent (read more about that reporthere. That was largely a result of Magellan converting three of its core global equities products into one fund with two different unit classes – both listed.
But prior to the Magellan restructure and the December quarter, Dyall was tracking the flows into Magellan’s listed fund and unlisted trusts.
“If you calculate their net flows in unlisted unit trusts, they are very successful but choppy. But if you look at their ETP flows they are as stable as,” he says.
“Retail money is more valuable to the product manufacturers because it is stickier but it too has its own lifecycle. We are all aware of many products that were the King Kong of their day but now they are nothing.”
Winner takes all
In terms of how the trend towards ETPs will change the funds management landscape, Dyall points out that a fund manager needs the right kind of capital to be able to launch a fund as an ETP.
“I’m really concerned about the future of a lot of funds managers in this country, particularly local ones, if they are not able to capture the ETP market. My view is that you need a certain amount of plumbing to run an ETP – compliance, a market maker, all sorts of things, there is a lot of work involved and it’s very expensive,” he says.
While there are some larger product issuers – such as BetaShares and VanEck – who will partner with boutique fund managers, they have a finite capacity. Smaller fund managers are ultimately going to struggle if ETPs become the dominant product type or distribution vehicle as per Dyall’s predictions in the chart below.