Fund Review BetaShares FTSE RAFI Australia 200 ETF

Transcription

1 Fund Review P 1-6 ANALYST: BENJAMIN O'SHEA APPROVED BY: MICHAEL ELSWORTH ISSUE DATE Key information FUND MANAGER ASSET CLASS SECTOR SUB SECTOR INVESTMENT TYPE PDS OBJECTIVE INDEX PROVIDER UNDERLYING INDEX BETASHARES CAPITAL LTD AUSTRALIAN EQUITIES AUSTRALIAN LARGE CAP STRATEGY - PASSIVE EXCHANGE TRADED FUND (ETF) LISTED ON THE AUSTRALIAN SECURITIES EXCHANGE PROVIDE AN INVESTMENT RETURN THAT TRACKS THE PERFORMANCE OF THE UNDERLYING INDEX BEFORE TAKING INTO ACCOUNT FEES AND EXPENSES. FTSE INTERNATIONAL LIMITED FTSE RAFI AUSTRALIA 200 INDEX DERIVATIVE USE IN LIMITED CIRCUMSTANCES BUT CANNOT BE USED TO LEVERAGE THE FUND SECURITIES LENDING THE MANAGER HAS NO INTENTION TO USE SECURITIES LENDING ASX LISTING DATE JULY 2013 DISTRIBUTION FREQUENCY FUND SIZE Fees MANAGEMENT COSTS Daily trading information TICKER SEMI-ANNUAL $262.26M 0.4% P.A. (INCLUDES ADDITIONAL EXPENSES CAPPED AT 0.10% P.A.) QOZ 52 WEEK LOW $ WEEK HIGH $13.51 LAST PRICE $12.92 LAST NET ASSET VALUE (NAV) $12.93 PREMIUM / DISCOUNT TO NAV (DAILY) -0.06% AVERAGE DAILY TRADED VOLUME 60,378 AVERAGE DAILY TRADED VALUE $780,254.6 Top 10 holdings COMMONWEALTH BANK OF AUSTRALIA 8.1% BHP BILLITON LTD 7.69% WESTPAC BANKING CORP 7.25% AUSTRALIA AND NEW ZEALAND BANKING GROUP LTD 6.58% NATIONAL AUSTRALIA BANK LTD 6.47% WESFARMERS LTD 4.86% WOOLWORTHS LTD 4.13% SUNCORP GROUP LTD 2.11% WOODSIDE PETROLEUM LTD 1.96% RIO TINTO LTD 1.84% What this Rating means The Recommended Index rating indicates that Lonsec has strong conviction the financial product can generate risk adjusted returns in line with relevant objectives. The financial product is considered an appropriate entry point to this asset class or strategy. Strengths The Fund represents an efficient means of gaining a non-market capitalisation weighted exposure to the Australian equities market using the methodology developed by Research Affiliates LLC of Newport Beach, California. The RAFI strategy now has a four year live track record in Australia and twelve years globally. The RAFI Underlying Index seeks to address some unintentional biases inherent in some market capitalisation weighted indices e.g. avoiding value traps and financially distressed companies. Weaknesses The fee load of the Fund is higher than broad based Australian equity ETFs tracking traditional market capitalisation weighted indices. Fund Risk Characteristics BUSINESS SUSTAINABILITY RISK CAPITAL VOLATILITY SECURITY CONCENTRATION RISK SECURITY LIQUIDITY RISK LOW MODERATE HIGH Risk categories are based on Lonsec s qualitative opinion of the risks inherent in the financial product s asset class and the risks relative to other financial products in the relevant Lonsec sector universe. BIOmetrics Aggregated risks STD RISK MEASURE A Standard Risk Measure score of 6 equates to a Risk Label of High and an estimated number of negative annual returns over any 20 year period of 4 to less than 6. This is a measure of expected frequency (not magnitude) of capital losses, calculated in accordance with AFSA/FSC guidelines. Features and benefits COMPLEXITY ESG AWARENESS LOW MODERATE HIGH We strongly recommend that potential investors read the product disclosure statement or investment statement. Lonsec Research Pty Ltd ABN AFSL. No This information must be read in conjunction with the warning, disclaimer and disclosure at the end of this document. This report supersedes all prior reports.

2 P 2-6 ANALYST: BENJAMIN O'SHEA APPROVED BY: MICHAEL ELSWORTH ISSUE DATE Fee profile FEES VS. UNIVERSE FEES VS. ASSET CLASS FEES VS. SUB-SECTOR LOW MODERATE HIGH Fee BIOmetrics are a function of expected total fee as a percentage of expected total return. What is this Fund? BetaShares, (or 'the Manager ) adopts a passive investment strategy in managing the BetaShares FTSE RAFI Australia 200 ETF ( QOZ or the Fund ). The Fund is designed to track the performance of the FTSE RAFI Australia 200 Index (or the Underlying Index ) before fees and expenses. The Underlying Index is constructed using an enhanced fundamental indexing approach developed by Research Affiliates and launched in association with FTSE International Limited ('the Index Provider'). The fundamental indexing approach typically results in the Fund exhibiting a mild value bias relative to a market cap weighted index. Research Affiliates believes that traditional market capitalisation weighted indices have structural flaws based on the link between price and portfolio weight. Empirical evidence suggests these approaches tend to overweight overvalued stocks and underweight undervalued stocks. Four fundamental measures of company size are used to determine the constituents of the Underlying Index: i) Sales (five year average total sales) ii) Cash Flow (five year average cash flows) iii) Dividends (five year average of all regular and special dividends) iv) Book Value (book equity value at review date). In comparison to the market capitalisation weighted S&P/ASX 200 Australia Index, the Fund as at 31 March 2017 had its largest overweight positions in BHP Billiton Ltd (+2.5%) and Woolworths (+1.9%) and most significant underweights in CSL Ltd (-2.8%) and Telstra (-1.9%). On a GICS sector basis, the Fund was skewed to Consumer Staples (+3.8%) and underweight to Health Care (-3.9%). Using this Fund This is General Advice only and should be read in conjunction with the Disclaimer, Disclosure and Warning on the final page. The Fund is a long only Australian equity product and as such will generally sit within the growth component of a balanced portfolio. As a mild value style product, Lonsec considers it to be suitable for blending with other Australian Equity strategies including style agnostic, growth style biased funds, Small Cap, Long / Short, or Absolute Return products. Suggested Lonsec risk profile suitability SECURE DEFENSIVE CONSERVATIVE BALANCED GROWTH HIGH GROWTH For guidance on appropriate asset allocations and risk profiles, refer to the latest Lonsec Strategic Asset Allocation Review and Risk Profile Definitions on our website. Lonsec Opinion of this Fund People and resources The Fundamental Indexing methodology is the intellectual property of Research Affiliates, a US based investment firm formed in 2002, specialising in index and smart beta investment strategies. Lonsec holds a favourable opinion of Research Affiliates and their fundamental indexing methodology and believes it to be underpinned by sound academic research. Investment approach The Fundamental Indexing methodology is considered by Lonsec to be relatively simple and transparent. The methodology is derived from back tested outcomes and is systematically applied to the construction of the final portfolio. These attributes have resulted in Lonsec considering the research and stock selection approach to be similar to that of a quantitative manager. Direct meetings with company s management and other bottom up research functions are not undertaken. However, unlike quantitative managers, the Fundamental Indexing approach does not attempt to forecast individual stock returns. The Fundamental Indexing methodology weights stocks based on four equally weighted fundamental measures of size, being Sales, Cash Flow, Book Value and Dividends. The stock selection model is static in nature and uses the average of five years of historical data for each measure (excluding Book Value, where the most recent asset valuation is used). Lonsec considers the methodology to be transparent, repeatable and based on fundamental measures which have historically proved to be successful in delivering positive performance outcomes. While appreciating the intuitive appeal of the strategy, Lonsec notes that the four factors used to construct the Underlying Index are backward looking. In certain situations active managers are able to source companies offering above average return potential by examining forward looking indicators. Nonetheless, the fees charged on these alternate active offerings are often higher. Overall Lonsec has maintained the Fund s Recommended (Index) rating. Lonsec considers the Fundamental Indexing methodology developed by Research Affiliates to offer a very good alternative to a traditional market cap weighted Australian equities index exposure. The strength of Lonsec's conviction is underpinned by the strategy's success globally and developing track record in Australia. For further information, please see Manager Review.

3 P 3-6 ANALYST: BENJAMIN O'SHEA APPROVED BY: MICHAEL ELSWORTH ISSUE DATE People and Resources BetaShares Holdings was established in 2009 as a specialist provider of exchange traded products. It is 53% owned by Horizons, 45% owned by BetaShares s management team and the remainder owned by private investors. Horizons is a fully controlled subsidiary of the Mirae Asset Global Investments Group. Mirae is a Korean based asset management entity with over $100bn of FUM. Mirae is particularly active in emerging market equities and is currently expanding its ETF platform globally. The Horizons family of ETFs has $16bn-plus in assets in ETFs listed across six countries. BetaShares has over $4.7bn of FUM across 40 ETF products as at September Size and experience NAME LOUIS CROUS POSITION SENIOR PORTFOLIO MANAGER & CIO EXPERIENCE INDUSTRY / FIRM 17 / 7 THONG NGUYEN PORTFOLIO MANAGER 15 / 6 DON HOANG CHAMATH DE SILVA ASSISTANT PORTFOLIO MANAGER ASSISTANT PORTFOLIO MANAGER 8 / 3 8 / 1 The BetaShares business currently employs 31 dedicated financial service professionals. More broadly, BetaShares benefits from access to the broader distribution, research, infrastructure and risk management systems and resources of its strategic partners, Horizons and Mirae. Investment Approach Overview BetaShares employs a passive investment strategy designed to track the performance of the Underlying Index, before fees and other costs. The approach can be described as full replication, whereby the Fund will generally invest in all securities in the Underlying Index in the same weights as they are held in the Index. This approach is designed to provide a portfolio with low turnover, accurate tracking, and low costs. Underlying index The FTSE RAFI Australia 200 Index is a non-market capitalisation weighted index which uses the Fundamental Index methodology developed by Research Affiliates LLC of Newport Beach, California. The Underlying Index breaks from the traditional pricebased market cap weighted design, and instead derives its constituent weights from fundamental measures of company size (or the so-called economic footprint ). The methodology calculates fundamental value based on: Sales company sales averaged over the prior five years. Cash Flow company cash flow averaged over the prior five years, defined as operating income plus depreciation and amortisation. Book Value company book value at the review date. Dividend total dividend distributions averaged over the last five years, including both special and regular dividends paid in cash. The calculation of the fundamental weighting of a real estate company is carried out in a similar way, using revenues, total assets, adjusted funds from operations, and dividends as the four factors. The Index Provider ranks the securities in descending order of their fundamental value and divides the fundamental value by its free-float adjusted market capitalisation. The largest 200 companies are determined in this way and weights set in proportion to their fundamental value at the annual rebalance. Transparency The rules dictating the constitution of the Underlying Index are available on the Index Provider's website and the Manager also makes the holdings of the Fund available on their website on a daily basis. Accordingly, Lonsec believes the transparency of the Fund to be excellent. Liquidity The Fund traded on the ASX on every day except one of the previous 250 days to July Compared to other ETFs in Lonsec's 'strategy - passive' Australian equity peer group, the Fund has higher amounts of FUM. Despite having less trading activity and FUM compared to the ETFs that track the S&P/ASX 200 Index, Lonsec considers the liquidity of the Fund to be very good. The Manager has also employed reputable market makers and authorised participants that will act to ensure investors can buy and sell units of the Fund at a reasonably accurate price (i.e. consistent with the net asset value of the underlying securities) in most normal market conditions. Fees and Indirect Costs The Management Fee (0.40% p.a.) and the average Bid / Ask Spread (0.11% p.a. for the 12 months to July 2017) of the Fund are marginally higher than most peers offering a similar passively managed non-market cap weighted exposure to the Australian equity market. Lonsec notes that the costs associated with these non-market cap weighted ETFs are higher than funds tracking the performance of traditional market capitalisation weighted indices.

4 P 4-6 ANALYST: BENJAMIN O'SHEA APPROVED BY: MICHAEL ELSWORTH ISSUE DATE Fee comparison FUND NAME BETASHARES FTSE RAFI AUSTRALIA 200 ETF (QOZ) VANECK VECTORS AUSTRALIA EQUAL WEIGHT ETF (MVW) ISHARES EDGE MSCI AUSTRALIA MULTIFACTOR ETF (AUMF) REALINDEX AUSTRALIAN SHARE FUND - CLASS A (FSF0976AU) VANGUARD AUSTRALIAN SHARES INDEX ETF (VAS) MER (% P.A.) BID/ASK SPREAD (%)* ISHARES CORE S&P/ASX 200 ETF (IOZ) SPDR S&P/ASX 200 ETF (STW) Bid / Ask Spread ASX 12-month data to 31 July Performance The Fund s one-year total return diverged -0.20% from that of its Underlying Index minus fee returns objective with a Tracking Error of 0.04% p.a (all figures net of fees to 31 August 2017). These results were mid-range in Lonsec's Australian equities 'strategy - passive' peer group but inferior to the 'broad based' peer group. However, Lonsec recognises that compared to ETFs tracking the market capitalisation weighted S&P/ASX 200 Index, the Manager faces greater challenges in dealing with corporate action events and basis risk (i.e. using SPI ASX 200 Index Futures to equitise cash and accruals can lead to tracking difference). The Underlying Index's three-year return figure was 6.4% p.a., exceeding that of the 5.1% p.a. of the S&P/ASX 200 Index's by 1.3% p.a. Whilst believing that a threeyear period represents an insufficient time period to be able to draw any conclusions, Lonsec does note that the Research Affiliates Fundamental Indexing methodology has delivered sustained outperformance of market capitalisation weighted indices in some global markets. Risks An investment in the Fund 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 Product Disclosure Statement and should be read in full and understood by investors. Lonsec considers the major risks to be: Equity market risk Investments in equity markets are subject to numerous factors which may have an impact on the performance of an investment (both positive and negative). Unexpected changes in economic, technological, structural, regulatory or political conditions can have an impact on the returns of all investments within a particular market. Tracking error risk The Fund seeks to minimise the Tracking Error against the Underlying Index it aims to match. There is no guarantee that this objective will be met. Derivative risk The Manager may utilise derivative instruments, including futures to equitise cash, and risk management purposes. Derivatives will not be used to leverage the portfolio. Further information Further information can be obtained by calling BetaShares on or visiting:

5 P 5-6 ANALYST: BENJAMIN O'SHEA APPROVED BY: MICHAEL ELSWORTH ISSUE DATE Quantitative Performance Analysis - annualised after-fee % returns (at ) Performance metrics 1 YR 2 YR 3 YR 5 YR TOTAL RETURN (% PA) STANDARD DEVIATION (% PA) EXCESS RETURN (% PA) WORST DRAWDOWN (%) TIME TO RECOVERY (MTHS) NR TRACKING ERROR (% PA) FUND: BETASHARES FTSE RAFI AUSTRALIA 200 ETF BENCHMARK USED: FTSE RAFI AUSTRALIA 200 TR INDEX AUD TIME TO RECOVERY: NR - NOT RECOVERED, DASH - NO DRAWDOWN DURING PERIOD Growth of $10,000 over three years Premium/discount to NAV over one year Monthly excess returns over three years Traded Volume and FUM

6 ISSUE DATE P 6-6 ANALYST: BENJAMIN O'SHEA APPROVED BY: MICHAEL ELSWORTH Glossary Click here for the glossary of terms. About Lonsec Lonsec Research Pty Ltd (Lonsec) is an investment research house with specialist areas of expertise, that was originally established in 1994 and the current entity was registered on 23 June From 1 July 2011, Lonsec became a fully owned subsidiary of Lonsec Fiscal Holdings Pty Ltd, a privately owned entity with a multibrand strategy of providing leading financial services research and investment execution. Lonsec believes that professional financial advisers need informed opinions on the best investment strategies and financial products to provide real value for their clients. To meet this need, Lonsec has in place an experienced research team, which draws on a robust research process to undertake in-depth assessment of managed fund products. Analyst Disclosure and Certification Analyst remuneration is not linked to the research or rating outcome. Where financial products are mentioned, the Analyst(s) may hold the financial 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. LONSEC STRONGLY RECOMMENDS THIS DOCUMENT BE READ IN CONJUNCTION WITH THE RELEVANT PRODUCT DISCLOSURE STATEMENT OR INFORMATION STATEMENT IMPORTANT NOTICE: This document is published by Lonsec Research Pty Ltd ABN , AFSL No (Lonsec). Please read the following before making any investment decision about any financial product mentioned in this document. Disclosure at the date of publication: Lonsec receives a fee from the fund manager or product issuer(s) for researching the financial product(s) set out in this document, using objective criteria. Lonsec may also receive a fee from the fund manager or product issuer(s) for subscribing to research content and other Lonsec services. 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 details of these holdings are not known to the Analyst(s). Disclosure of Investment Consulting services Lonsec receives fees for providing investment consulting advice to clients, which includes model portfolios, approved product lists and other financial advice and may receive fees from this fund manager or product issuer for providing investment consulting services. The investment consulting services are carried out under separate arrangements and processes to the research process adopted for the review of this financial product. For an explanation of the process by which Lonsec manages conflicts of interest please refer to the Conflicts of Interest Policy which is found at: Warnings: Past performance is not a reliable indicator of future performance. Any express or implied rating or advice presented in this document is limited to General Advice (as defined in the Corporations Act 2001(Cth)) 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 does not constitute a recommendation to purchase, redeem or sell the relevant financial 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 financial product. Lonsec s research process relies upon the participation of the fund manager or product issuer(s). Should the fund manager or product issuer(s) no longer be an active participant in Lonsec s research process, Lonsec reserves the right to withdraw the document at any time and discontinue future coverage of the financial product(s). The rating in this publication relates to the fund outlined in the publication which may have related funds or be associated with other funds and platforms. The rating may only be applied to the fund outlined in this publication at first instance and whether it applies to related or associated funds and platforms should be investigated by your financial adviser before you make an investment decision in relation to the related or associated funds and platforms. You should be aware that the mandate, fees, underlying investments, the issuers of the related and associated funds and platforms may be different from the fund specified in this publication. You should satisfy yourself that the related and associated funds and platforms meet your financial circumstances, needs and objectives before making an investment decision. 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. Financial 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, officers, employees and agents disclaim all liability for any error or inaccuracy in, misstatement 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. Copyright 2017 Lonsec Research Pty Ltd (ABN , AFSL No ) (Lonsec). This report is subject to copyright of Lonsec. 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