Russell High Dividend Australian Shares ETF

Transcription

1 Russell High Dividend Australian Shares ETF Key Information Investment Type Objective ASX Code Responsible Entity Registrar Index Provider Underlying Index Administrator Website Exchange Traded Fund (ETF) listed on the Australian Securities Exchange (ASX). To provide a total return before costs and tax, in line with the Russell Australia High Dividend index over the long term. RDV Russell Investment Management Ltd (Russell) Computershare Investor Services Pty Ltd. Frank Russell Company Russell Australia High Dividend Index State Street Australia Ltd. Distributions Distributions calculated either quarterly or as determined by Russell. It expected income will be distributed quarterly within 30 days after the end of March, June, September and December. Requests can be made for distributions to be reinvested or paid in to a bank account. Derivative use Fees & Commissions Management Costs Brokerage Portfolio Information* 12% Up to 5% of the Fund, predominately to equitise cash reserves 0.46% p.a. calculated on the average net assets of the Fund Normal brokerage commissions apply as per any transaction for securities traded on the ASX. 6% 10% 5% Top 10 Companies Sector Weight Commonwealth Bank Financials 7.23% BHP Billiton Materials 7.16% Westpac Bank Financials 6.72% ANZ Banking Group Financials 5.75% National Australia Bank Financials 5.74% Telstra Telecom. Services 5.70% Wesfarmers Food & Staples Retail 3.77% Woolworths Food & Staples Retail 2.92% Tatts Group Consumer Services 2.86% SP Ausnet Utilities 2.73% * As at 31 October % 4% 1% 3% 13% 42% Financials Materials Industrials Property Consumer Staples Consumer Discr. Telecom. Services Energy Health Care Utilities What this Rating Means The Recommended rating indicates that Lonsec has conviction that the fund or product can achieve its objectives and, if applicable, outperform peers over an appropriate investment timeframe. The manager or product has a number of competitive advantages in people, process and product design. The investment is a recommended entry point to access this asset class or strategy. Using this Fund This is General Advice only and should be read in conjunction with the Disclaimer, Disclosure and Warning on the final page. ETFs are suited to those investors who believe the Index provides an efficient long term return or are unwilling to pay the additional fees involved with active investment management. The Russell High Dividend Australian Shares ETF (ASX listed under RDV, the Fund ) provides exposure to blue chip ASX listed securities expected to deliver higher after tax yields than the market average. Given the lower turnover nature of the Fund it may be most suited to investors seeking a tax effective income stream from their equity investments. It is important to note that the Fund s distributable income is derived from a portfolio of listed assets, and as such, distributions can fluctuate as listed companies are not obligated to maintain a certain level of, nor pay, dividends on a regular basis. This is unlike what is normally associated with traditional income producing assets (for example, fixed interest). Lonsec Opinion of this Fund The global ETF market has seen exceptional growth since first coming to prominence in While Russell is a relatively new participant in the ETF space, with Fund representing its first Australian offering, Russell has a long history of running equity indices, having launched its first in Russell s scale and commitment to the further development of the global indexing industry is impressive. Lonsec believes that index funds are suited to being offered as ETFs. The Fund represents an efficient, liquid and costeffective means for investors to gain index exposure to an income focused equity fund. The underlying index that the Fund seeks to replicate offers a broad representation across high yielding blue chip ASX listed securities. WE STRONGLY RECOMMEND THAT POTENTIAL INVESTORS READ THE PRODUCT DISCLOSURE STATEMENT 1 Limited ABN AFSL No Participant of ASX Group.

2 Russell s risk controlled investment process has a number of checks and balances within it prior to trades being executed to take account of issues such as tax implications of any trade. Russell has also implemented an administrative tool which protects investor s access to upcoming distributions. Lonsec considers these practises to be prudent and unique within the Equity Income ETF universe. Russell s systems are sophisticated and allow for daily monitoring of the Fund and Index. Lonsec considers technology to be an important factor in establishing scalable index and / or ETF businesses. Lonsec has a long history of reviewing Russell managed funds across multiple asset classes. Lonsec considers a strong attribute at Russell to be the depth and calibre of the personnel, with a clear focus on continuous improvement within investment research and decision-making models. Lonsec has visited Russell s head office in the USA, as well as meeting with senior Russell investment personnel in its Sydney office. Lonsec considers Russell s investment process to be thorough, well developed and believes the overall quality of Russell investment personnel and research effort to be very high. The Russell website ( is both comprehensive and user-friendly, although in recent times some peers have progressed the usability of their websites beyond the Russell offering. The website is designed as a self-service website with information relating to performance and current holdings for the Fund. In 2008 there was significant turnover across the broader Russell business, although Lonsec notes the Australian Investment team has been stable since that time with key team members settling into their new positions following the significant structural changes made in Investment Strategy The Fund seeks to track the performance of the Russell Australia High Dividend Index (the Index, detailed below) by investing predominantly in Australian shares and trusts listed on the ASX. The Index, and therefore the fund, is weighted primarily toward companies that are expected to provide higher dividends. The Fund has the potential to deviate its holdings from that of the Index from time to time, this capability will primarily be used to take advantage of tax consequences that may arise from holding securities for longer (or shorter) periods. The Fund may also employ derivatives, to a maximum of 5%, to manipulate the exposure to certain securities and equities residual cash positions by purchasing index futures, at the time of writing the review this facility had not been utilised. Index Construction The Index is an equity index provided by the Frank Russell Company. The Index is designed to provide exposure to above average dividends, including franking credits, through a diversified exposure to large cap blue chip Australian companies. Construction of the Index starts with the constituents of the Russell Australia Large Cap Index (a sub-index of the Russell Global Index). Australian infrastructure stocks, which are not part of the Russell Australia Large Cap Index, are added to the universe to be considered for inclusion in the Index. The objective underpinning the Index construction is to target securities expected to deliver higher than average dividends and to identify better quality dividends. To capture the quality aspect of each companies dividends, the methodology encompasses a penalty for companies which have paid inconsistent dividends over time. Those companies which have had falling dividends and companies with expected fall in dividends in the future. All dividend calculations explicitly include the associated franking credits. The quantitative factors used in the model are not equally weighted; rather weighted by their relative importance to the objective of the Index. Therefore the greatest emphasis is placed on future dividends then equal weighting is applied to historical yields, dividend growth (including trailing and forecasted growth) and EPS variability. The aggregated scores are then compiled to produce a ranking for each stock in the final Russell Australia High Dividend Index universe. The final Index comprises: The top 50 Australian companies by stock weight, determined by reference to the market capitalisation, and The specific weighted quantitative and qualitative dividend characteristics as described above. The final Index will consist of the securities of 50 ASX listed blue chip companies. Turnover in stock names is expected to be approximately 30% p.a. The Russell Australia High Dividend Index is reconstituted semiannually at the end of February and August. Investment Manager Corporate Russell Investment Group Pty Ltd is a wholly owned subsidiary of the US-based Frank Russell Company. Established by Frank Russell as a small brokerage firm in Tacoma, Washington in 1936, over time the business expanded into consulting and pioneered multi-manager investing. In 1999, Frank Russell Company became a subsidiary of The Northwestern Mutual Life Insurance Company, one of the largest providers of life insurance in the US. In July 2008, Nippon Life acquired a 5% equity stake within Russell. Worldwide, Russell has approximately

3 A$142 billion of funds under advice (as at November 2011). In Australia, Russell advises on A$19 billion of assets. Size and Experience Globally, Russell has approximately 1,900 employees structured across regional business units covering the Americas, EMEA (Europe, Middle East and Africa) and the Asia-Pacific, and overlaid by Global Service Lines (including; Investment Division, Consulting and Advisory Services, DB/DC Outsourcing, OpenWorld, Retail, Investment Services and ETFs). The service lines aim to work with the regional business units to leverage the firm s global functional resources. Russell is a widely recognised global index construction company. Russell launched their first index in 1984 and according to the most recent Russell publication in May 2010, now has indices that cover approximately 98% of global listed securities valued at over US$3.9 trillion. Lonsec believes that Russell has competitive advantages in its long heritage in index investing, extensive global resources and the size and experience of its research team. This is coupled with the depth of resourcing to conduct all phases of the investment process in-house. Since the last Fund review Russell Investments have built out a dedicated ETF team based in San Francisco, with 57 members around the globe. This team includes the Fund s PM, Scott Bennett who has moved to a full time Australian Equity direct assets role. Bennett is no longer a part of the Multi-Manager team and therefore has no managed funds research responsibilities, although he still participates in their sector meetings and is dedicated to the management of directly held portfolios. With approximately 550 investment professionals globally dedicated across manager research, portfolio construction and capital markets research, the depth and quality of resources (both people and systems) employed in the investment process are among the strongest of peers assessed by Lonsec. The broader investment team is comprised of a range of tenures, and importantly, a diverse but complementary range of skill-sets. Structure Overview The Fund is an exchange traded fund whose shares trade intra-day at prevailing market prices in a similar manner to other securities on the ASX. With the exception of voting arrangements, investors generally have the same rights as investors in shares. All economic benefits such as dividends, bonus issues, rights issues etc flow through to investors. The Fund holds a portfolio of securities managed to generally correspond to the performance of Index (before fees and expenses). Unlike actively managed Funds, RDV does not try to beat the index it tracks and does not seek temporary defensive positions when markets decline or appear overvalued, although it will differ from the index to take advantage of events such as share buy-backs and complying with franking rules which may not be captured in the quantitative index construction process. Replication of the Index Russell may employ optimisation techniques involving futures contracts to enable a more efficient use of accumulated cash reserves. This may see individual security weightings vary marginally from the Index from time to time. However, derivatives will not be used to leverage the Fund. The Fund may invest in securities that have been or are expected to be included in the Index. Russell receives price feeds, corporate actions adjustments and Index constituent information from the Index provider on a daily basis. Any structural changes are notified to Russell Investments immediately as they occur. Creation / Redemption of Units The Fund creates and redeems ETF units at net asset value, which is calculated daily. Only authorised participants are able to create and redeem ETF units directly with Russell. All other investors may purchase or sell ETF securities through brokers, authorised participants, market makers or liquidity providers on the ASX. Authorised participants create and redeem in the primary market whereas market makers and liquidity providers trade in the secondary market. Derivatives The Fund may employ optimisation techniques involving equity index futures contracts to enable more efficient use of accumulated cash reserves. These positions will generally be limited to no more than 5% of the Fund. Derivatives will not be used to leverage the Fund or for speculative purposes. Stock Lending The Fund has the capability to participate in securities lending programs. Any income received as revenue from participating in the lending program will be used to offset management costs and may result in a lower fee for the Fund, at the time of writing this Review the facility has not been utilised. Differences from Managed Funds Liquidity Most managed funds are structured as unit trusts where investors buy unlisted units in a fund. The Fund offers investors liquidity via the ASX. Some authorised participants act as dedicated market makers and seek to provide continuous liquidity to the market. Russell Investments distributes a net asset value for the Fund every day, allowing market makers to price the Fund s shares. Market makers place a buy/sell spread around

4 the Fund s shares and quote these prices on the ASX. Marker maker quotes are updated continuously throughout the day to reflect price changes in the underlying securities. The number of issued securities for the Fund can be increased or decreased on a daily basis according to investor demand (unlike a listed investment company which has a fixed supply of shares on issue). Large volumes of the Fund s shares can be created (redeemed) by the delivery (receipt) of the underlying shares from authorised participants. This ensures the Fund s share price will be kept closely in line with the net asset value of the Fund because an authorised participant will arbitrage the difference away through primary market activity. The creation / redemption feature also means: Fees the Fund s share price will be kept closely in line with the net asset value of the Fund because an authorised participant will arbitrage the difference away through primary market activity. This is in contrast to a listed investment company, which has a fixed number of shares that can trade at a premium or discount to net asset value. the actions of one investor on the secondary market are quarantined from other investors, so a redemption by one investor does not trigger a tax event for other investors (as is not the case with a managed fund). The tax implications of redemptions by an authorised participant on the primary market are also potentially reduced as any tax is allocated out to the exiting unit holder, rather than left to be borne by remaining investors in the ETF The typical fees for an actively managed fund amongst the Lonsec reviewed Australian Income Focused actively managed funds are 0.60%pa to 2.50%pa. RDV management costs are 0.46%p.a. Transparency Information relating to the underlying portfolio of securities in the Fund is made available via the ASX and Russell websites. Tax Efficiency RDV is expected to be a lower turnover fund, c.30% p.a., relative to many actively managed funds, with turnover reflecting changes to the Index, relative to tax considerations being taken account of, usually on a semi-annual basis. Further, all dividends considered in the model are on an after tax basis and explicitly incorporates franking credits. Risks An investment in the RDV carries a number of standard investment risks associated with domestic and international investment markets. These include economic, political, legal, tax and regulatory risks. These and other risks are outlined in the relevant PDS for the Fund and should be read in full and understood by investors. Lonsec considers the major risks to be: Performance risk The value of, and returns (if any) from an investment in the Fund will depend upon the performance of the relevant underlying investments. There is no guarantee the value of an investment in any fund will increase. Tracking Error risk The Fund seeks to minimize the tracking error against the underlying index it aims to match. There is no guarantee that this objective will be met. This risk is comparatively higher when the fund may employ optimisation techniques such as the use of futures. Securities lending risk Should the Fund participate in securities lending there is a risk that the borrower, of lent stock, may be unable to meet its obligations. This may result in delays in recovering assets and in turn potential capital losses. In instances where collateral investments are received as part of the lending program, this collateral may be subject to general investment risks. Taxation Distributions The payment of distributions to Australian investors will typically be made quarterly. Arrangements can be made to have full or partial dividends reinvested. Generally, for Australian resident investors, unitholders will be assessable for taxation purposes on the net income of their entitlement. These comments constitute General Advice only and Lonsec advises investors to consult a taxation specialist before making a decision to invest (or not to invest) based upon these taxation considerations. Investors should refer to the RDV PDS for further information. Further Information Further information can be obtained by calling 1800 RSL ETF ( ) or visiting:

5 Analyst Disclosure & Certification: Analyst remuneration is not linked to the research or rating outcome. Where products are mentioned, the Analyst(s) may hold the product(s) referred to in this document, but Lonsec considers such holdings not to be sufficiently material to compromise the rating or advice. Analyst holdings may change during the life of this document. The Analyst(s) certify that the views expressed in this document accurately reflect their personal, professional opinion about the matters and financial product(s) to which this document refers. Date Released: December 2011 Analyst: Duncan Knight Authorised by: Lin Ngin LONSEC STRONGLY RECOMMENDS THIS DOCUMENT BE READ IN CONJUNCTION WITH THE RELEVANT PRODUCT DISCLOSURE STATEMENT(S) IMPORTANT NOTICE: The following relate to this document published by Lonsec Limited ABN ("Lonsec") and should be read before making any investment decision about the product(s). Disclosure at the date of publication: Lonsec receives a fee from the Fund Manager(s) for researching the product(s) using comprehensive and objective criteria. Lonsec s fee is not linked to the rating(s) outcome. Lonsec does not hold the product(s) referred to in this document. Lonsec s representatives and/or their associates may hold the product(s) referred to in this document, but detail of these holdings are not known to the Analyst(s). Lonsec was a member of the Zurich Financial Services Australia group until 30 June 2011 and where Lonsec rated product(s) issued by Zurich usual fee arrangements applied and the association did not affect the research process and outcome. Warnings: Past performance is not a reliable indicator of future performance. Any express or implied rating or advice presented in this document is a class service (as defined in the Financial Advisers Act 2008(NZ)) or limited to General Advice (as defined in the Corporations Act (C wth)) and based solely on consideration of the investment merits of the financial product(s) alone, without taking into account the investment objectives, financial situation and particular needs ( financial circumstances ) of any particular person. It is not a personalised service (as defined in the Financial Advisers Act 2008 (NZ)) and does not constitute a recommendation to purchase, redeem or sell the relevant product(s). Before making an investment decision based on the rating(s) or advice, the reader must consider whether it is personally appropriate in light of his or her financial circumstances, or should seek independent financial advice on its appropriateness. If our advice relates to the acquisition or possible acquisition of particular financial product(s), the reader should obtain and consider the Investment Statement or Product Disclosure Statement for each financial product before making any decision about whether to acquire a product. Lonsec s research process relies upon the participation of the Fund Manager(s). Should the Fund Manager(s) no longer be an active participant in Lonsec research process, Lonsec reserves the right to withdraw the document at any time and discontinue future coverage of the product(s). Disclaimer: This document is for the exclusive use of the person to whom it is provided by Lonsec and must not be used or relied upon by any other person. No representation, warranty or undertaking is given or made in relation to the accuracy or completeness of the information presented in this document, which is drawn from public information not verified by Lonsec. Conclusions, ratings and advice are reasonably held at the time of completion but subject to change without notice. Lonsec assumes no obligation to update this document following publication. Except for any liability which cannot be excluded, Lonsec, its directors, employees and agents disclaim all liability for any error or inaccuracy in, or omission from, this document or any loss or damage suffered by the reader or any other person as a consequence of relying upon it.