As indicated by the flows being modelled into ProductRex, advisers are carrying on their behaviours we identified in 2022 – the love for passive and listed!
As the second biggest modelling tool in Australia and highest rated advice software, advisers are now consistently modelling more than $1billion through ProductRex, the second biggest modelling tool in Australia and highest rated advice software – with adviser’s love for passive evident through the modelling of flows into Vanguard.
Flow Chart: Advisers are now modelling more than $billion through the number one rated ProductRex software
A few active managers are finally awake to the fact, but we continue to be confounded by the lack of any real intent in the listed space. In 2022 only 14 active ETFs were launched, which was admittedly a slight improvement on the 10 in 2021, 9 in 2020, and 9 in 2019. We’ve previously hypothesised that development cost or knowledge barriers were hindering uptake, but that no longer feels right, given the spread of information over time and what we understand to be lowering costs to launch. It is more likely that two misconceptions are holding back greater active ETF launch activity.
Firstly, we believe many active managers hold a view that listed fund buyers = direct investors, and that this is not a sales channel they are equipped to serve. Secondly, we believe many active managers hold a view that the “listed effect” (the much stronger net flow growth from listed vehicles vs unlisted vehicles) = the “passive effect” (i.e that listed fund net flows growth is only higher than unlisted fund growth because the bulk of listed funds are passive).
On the first misconception (listed fund buyers = direct investors) prior to observing the flows being modelled by advisers through ProductRex, it is notoriously difficult for outsiders to obtain a line of sight on the underlying buyers of listed funds. We have however spoken with active managers who have recently launched both listed and unlisted variants of the same fund. They report that roughly half of their flows are going into the listed variant and half into the unlisted variant.
These managers are not marketing to direct investors nor receiving inbound enquires from them. They, therefore, believe the bulk of their listed variant flows are coming from financial planners who are choosing to execute via a listed exchange. We consider this a credible proposition given the uptake of SMA structures and the superior liquidity and executional efficiency that listed funds provide relative to their unlisted counterparts.
On the second misconception (that the “listed effect” = the “passive effect”) we recently undertook two pieces of hard analysis which we believe provide a strong argument to refute this view.
The first was to compare the aggregate net flows of Vanguard funds which have both a listed and unlisted variant of the same fund. The degree to which the listed variants outperformed the unlisted variants (if at all) could be broadly considered to be attributable to listing – that is to say, the “passive effect” and the “listed effect” could be unbundled.
This analysis indicates a benefit from listing, separate from being passive. The second piece of analysis involved comparing the aggregate net flows of funds issued by active managers which had both a listed and unlisted variant. The degree to which the listed variants outperformed the unlisted variants (if at all) could likewise be broadly considered to be attributable to listing.
We believe this analysis also indicates a benefit from listing – a “listed effect”. We do however temper the size of the apparent effect with two mitigating factors. Firstly, the listed variants are all newer, in most cases quite new, so the extent of any outflows that could occur is naturally limited (i.e. you can’t get outflows on zero net assets).
And secondly, there has likely been a degree of substitution from the unlisted vehicles to the listed vehicles by existing investors. To the degree that this has occurred, the apparent listing effect has been erroneously magnified. Regardless of these two mitigants, we are confident that a genuine “listed effect” is still evident.
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