Fund Review Betashares Australian Bank Senior Floating Rate Bond ETF

Transcription

1 Fund Review Betashares Australian Bank Senior Floating Rate P 1-5 ANALYST: MICHAEL ELSWORTH APPROVED BY: LIBBY NEWMAN ISSUE DATE About this Review ASSET CLASS REVIEWED SECTOR REVIEWED SUB SECTOR REVIEWED FIXED INTEREST ALTERNATIVE INCOME PASSIVE TOTAL FUNDS RATED 1 About this Fund ASIC RG240 CLASSIFIED FUND REVIEWED ASX CODE PDS OBJECTIVE DISTRIBUTION FREQUENCY BETASHARES AUSTRALIAN BANK SENIOR FLOATING RATE BOND ETF NO QPON TO PROVIDE AN INVESTMENT RETURN THAT AIMS TO TRACK THE PERFORMANCE OF THE SOLACTIVE AUSTRALIAN BANK SENIOR FLOATING RATE BOND INDEX, BEFORE TAKING INTO ACCOUNT FEES AND EXPENSES MONTHLY FUND INCEPTION MANAGEMENT FEE RESPONSIBLE ENTITY 0.22% P.A.(INCLUDING 0.03% P.A. EXPENSE RECOVERY FEE) About the Fund Manager FUND OWNERSHIP BETASHARES CAPITAL LTD BETASHARES CAPITAL LTD 55% OWNED BY MIRAE ASSET GLOBAL INVESTMENT GROUP, 42% OWNED BY BETASHARES MANAGEMENT TEAM, 3% OWNED BY PRIVATE INVESTORS. Investment Team PORTFOLIO LOUIS CROUS, THONG NGUYEN, DON HOANG, CHAMATH DE SILVA INVESTMENT TEAM SIZE 4 INVESTMENT TEAM TURNOVER STRUCTURE / LOCATION Investment process STYLE BENCHMARK Fund rating history JUNE 2017 LOW SYDNEY RULES-BASED, INDEX TRACKING SOLACTIVE AUSTRALIAN BANK SENIOR FLOATING RATE BOND INDEX RECOMMENDED 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 Simple, transparent and efficient way for investors to position themselves for a rising interest rate environment. Little or no key person risk. Low default risk. Competitive fees. Monthly distributions provide regular income. Weaknesses Index rule which ranks FRNs from longest to shortest may not be advantageous for flat credit curves. Concentration risk is high. Tracking error may be impacted due to differences in the treatment of cash (bond coupons) between the ETF and the index. Fund Risk Characteristics BUSINESS SUSTAINABILITY RISK CAPITAL VOLATILITY CREDIT RISK INTEREST RATE RISK SECURITY LIQUIDITY RISK SECURITY CONCENTRATION RISK REDEMPTION RISK 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 2 equates to a Risk Label of Low and an estimated number of negative annual returns over any 20 year period of 0.5 to less than 1. This is a measure of expected frequency (not magnitude) of capital losses, calculated in accordance with AFSA/FSC guidelines. Features and benefits COMPLEXITY 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 2-5 ANALYST: MICHAEL ELSWORTH APPROVED BY: LIBBY NEWMAN ISSUE DATE Fee profile FEES VS. UNIVERSE FEES VS. ASSET CLASS Fee BIOmetrics are a function of expected total fee as a percentage of expected total return. What is this Fund? The BetaShares Australian Bank Senior Floating Rate (the Fund) invests in senior floating rate notes (FRNs) issued by Australian banks. FRNs pay distributions or coupons referenced to the bank bill swap rate, which moves up or down with changes short term interest rates. At least 80% of the FRNs held by the Fund are issued by the big 4 banks, with terms to maturity of 1 to 5 years. The Underlying Index rebalances on a quarterly basis and the index rules mean the Fund will sell shorter dated FRNs in favour of longer dated FRNs. As such, portfolio turnover is expected to be high at approximately 100% p.a. The Fund is relatively concentrated with a maximum of 14 securities from up to 10 issuers. Investors should note that prices of FRNs are sensitive to movements in credit spreads though FRN prices are less sensitive to fluctuations in interest rates than comparable fixed rate bonds. Using this Fund This is General Advice only and should be read in conjunction with the Disclaimer, Disclosure and Warning on the final page. Alternative Income sector products are typically managed with the aim of generating returns that exceed cash (or a cash proxy such as the Bloomberg Ausbond Bank Bill Index) by a margin. Product risk (Standard Deviation) expectations are generally positioned as low, barring periods of exceptional market circumstances. Lonsec suggests that the Fund should only be considered for investors who are (a) seeking yields greater than those from available in cash or cash-like instruments (e.g. bank bills) and, more importantly, (b) those prepared to accept low to moderate volatility in the unit price. The Fund may be considered beneficial for investors seeking a bond exposure but who are concerned about the adverse impact of rising rates on fixed rate investments. 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. Changes Since Previous Lonsec Review This is Lonsec s initial review. Lonsec Opinion of this Fund People and resources BetaShares is a specialist provider of ETFs with approximately $4.4 billion in funds under management (FUM) across 40 exchange traded products as at June At current levels of FUM, the company is profitable. BetaShares was formed in 2009 through a strategic partnership with Horizons ETFs ( Horizon ), which maintains a significant equity interest in the firm (57%). Post BetaShares s inception, Horizon was acquired by Mirae Asset Management, a South Korean asset management firm with significant scale. The Fund is managed by an investment team of four: Louis Crous (CIO), Thong Nguyen (Senior Portfolio Manager), Don Hoang (Assistant Portfolio Manager) and Chamath De Silva (Assistant Portfolio Manager). While the current size of the investment team is small relative to peers, Lonsec is comfortable with the firm s current resourcing given the simple structure of the Fund.Given the highly systematic approach to portfolio construction, key person risk is considered low. The Fund is currently supported by multiple market makers and authorised participants. Lonsec believers this arrangement benefits investors, as it promotes competition and tighter spreads within the primary and secondary markets. Underlying Index provider, Solactive AG, is new to the Australian market, however, their indices have been tracked by many global ETF providers since Lonsec considers the Underlying Index rules to be transparent. Research and portfolio construction The Fund tracks a simple rules-based index and so does not require the Manager to conduct credit research or make top-down portfolio construction calls. The only discretion afforded to the portfolio management team is in respect of trade execution where it is incumbent upon the team to trade in the most cost effective manner. Lonsec notes the Underlying Index ranks eligible securities by term to maturity from longest to shortest. This means the Fund rebalances into longerdated securities on a quarterly basis. During periods where the yield curve is normally shaped, the Fund s running yield could be expected to increase. However, the Fund s running yield could be expected to decrease when the credit curve is flat or the underlying cash rates decline. Lonsec notes it is the Manager s intention to adopt a full replication strategy where the Fund holds the exact same constituents of the Underlying Index. However, if the Fund becomes large enough it may be necessary for the Fund to hold securities which exhibit characteristics which are very close to Underlying Index constituents. There are also some differences in the treatment of cash. Lonsec believes that in the event of the Australian banking system suffering stresses and/or consolidation similar to that experienced by many European banking systems during the global financial crisis, it would be necessary to revisit the Underlying Index rules.

3 P 3-5 ANALYST: MICHAEL ELSWORTH APPROVED BY: LIBBY NEWMAN ISSUE DATE Risk management The Fund is managed in accordance with a clearly defined set of rules and is monitored daily by the investment team. Lonsec believes the Fund s risk constraints, as well as the monitoring systems in place, are appropriate for the Fund. Relative to more active peers, however, Lonsec notes that the Fund s risk management procedures, limits and systems are less sophisticated. The Manager does not undertake any form of credit analysis on the bank FRN issuers, with the only requirement for potential inclusion in the Underlying Index (and thus the Fund) being a minimum credit rating of BBB+. Performance The Fund has only recently listed on the ASX and as such has limited performance history. Overall Lonsec has assigned an initial rating of Recommended Index to the Fund. Lonsec views the use of an ETF structure as an efficient and cost effective way to access floating interest rate exposure and take advantage of an increasing interest rate environment. Lonsec also notes that BetaShares portfolio management team is well equipped to manage the Fund given its simple structure. The offering is also competitively priced relative to peers. People and Resources Corporate overview BetaShares Holdings was established in 2009 as a specialist provider of exchange traded products. It is 57% owned by Horizons, 40% 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 $100 billion in assets under management. BetaShares Capital Ltd (BetaShares) is the Fund s Responsible Entity and is accountable for the ongoing management of the Fund s underlying assets. It is a wholly-owned subsidiary of BetaShares Holdings Pty Ltd (BetaShares Holdings). BetaShares Holdings was established in 2009 as a specialist provider of exchange traded products. It is 57% owned by Horizons, 40% 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 US$100b of FUM. Mirae is particularly active in emerging market equities and is currently expanding its ETF platform globally. The Horizons family of ETFs has over US $13 billion in assets in ETFs listed across 6 countries. BetaShares has over $4.4bn of FUM across 40 ETF products as at June Size and experience NAME LOUIS CROUS THONG HGUYEN DON HOANG CHAMATH DE SILVA POSITION SENIOR PORTFOLIO & CIO SENIOR PORTFOLIO ASSISTANT PORTFOLIO ASSISTANT PORTFOLIO EXPERIENCE INDUSTRY / FIRM 17 / 7 13 / 6 7 / 3 8 / 1 The BetaShares business currently employs 32 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. Research Approach Overview The Fund seeks to track the Underlying Index (before fees and expenses) and invests all of its assets in senior FRNs issued by APRA regulated Australian banks. The Manager does not undertake fundamental credit research on underlying banks before investing in FRNs, however there is a requirement that securities must be eligible for use in the RBA s domestic market operations. The RBA s eligibility criteria includes a requirement that securities have a minimum credit rating of BBB+. The majority of the Portfolio Managment team s analysis invloves monitoring FRN liquidity with a view to ensuring efficient and cost effective portfolio changes. Due to its scale and banking relationships, BetaShares is able to negotiate favourable terms in normal market environments.

4 P 4-5 ANALYST: MICHAEL ELSWORTH APPROVED BY: LIBBY NEWMAN ISSUE DATE Portfolio Construction Overview UNDERLYING INDEX RETURN OBJECTIVE INVESTMENT UNIVERSE BAND 1 BAND 1 LIMITS BAND 2 BAND 2 LIMITS NUMBER OF HOLDINGS REBALANCING SOLACTIVE AUSTRALIAN BANK SENIOR FLOATING RATE BOND INDEX TO TRACK THE PERFORMANCE OF THE UNDERLYING INDEX, BEFORE TAKING INTO ACCOUNT FEES AND EXPENSES. ONLY SENIOR FRNS DENOMINATED IN AUD AND ISSUED BY AUSTRALIAN BANKS. SECURITIES MUST HAVE A MINIMUM PRINCIPAL AMOUNT OUTSTANDING OF $500 MILLION AND A TERM TO MATURITY OF 1 TO 5 YEARS. ANZ, CBA, NAB, WESTPAC SECURITIES WITH THE LONGEST MATURITIES ARE SELECTED WITH UP TO TWO PER ISSUER. A WEIGHTING OF AT LEAST 80% BASED ON MARKET VALUE, WITH EACH SECURITY EQUAL WEIGHTED. AMP BANK, BANK OF QLD, BENDIGO AND ADELAIDE BANK, MEMBERS EQUITY BANK, SUNCORP-METWAY BANK SECURITIES WITH THE LONGEST MATURITIES ARE SELECTED WITH UP TO ONE PER ISSUER. A TOTAL WEIGHT OF 20% BASED ON MARKET VALUE, WITH EACH SECURITY EQUAL WEIGHTED UP TO MAX OF 5%. EXPECTED PORTFOLIO TURNOVER A MAXIMUM OF 14 SECURITIES FROM UP TO 10 ISSUERS QUARTERLY APPROXIMATELY 100% P.A. The Fund seeks to track the Underlying Index by adopting a full replication approach. There are no formal rules around liquidating FRNs in the event of a credit rating downgrade or other adverse events. There is a difference in the treatment of cash generated by the FRNs. The Index assumes immediate reinvestment whereas the ETF can retain some cash an anticipation of distributions and also for day to day liquidity needs should it be required. Liquidity The Fund s units trade intra-day at prevailing market prices in a similar manner to other securities on the ASX. Any economic benefits such as interest earned from holding assets will accrue to the benefit of the Fund. BetaShares has appointed multiple authorised participants to facilitate liquidity in the creation/ redemption facility (the primary market). Authorised participants are the only counterparties who can deal with the Responsible Entity in relation to the creation and redemption of units in the Fund. BetaShares has also appointed multiple market makers. Market makers are obligated to maintain pre-agreed spreads and volumes (on the Australian Stock Exchange) through the course of each trading day. Lonsec notes that there are circumstances where market making obligations may cease to apply and market makers will no longer be required to maintain the liquidity of the Fund. Examples of this include the closure of the exchange and the occurrence of price feed disruptions. Risk Management Risk limits The Fund invests only in senior AUD denominated FRNs issued by Australian banks. The Underlying Index rules are clearly outlined in the PDS. Risk monitoring The Fund s restrictive investment universe means risk monitoring is a relatively simple process. The Underlying Index rules are clear and easily implementable during normal market conditions. 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 PDS and should be read in full and understood by investors. Lonsec considers the major risks to be: Performance risk There is no assurance or guarantee the returns of the Fund will meet its investment objective. Interest rate risk Interest rates payable on the securities held by the Fund, being floating rate debt securities will vary from period to period based on movements in the relevant reference rate. In a period of falling interest rates, distributions from the Fund could be expected to fall. However, because the securities held by the Fund typically adjust their payments frequently, movements of interest rates can be expected to have less impact on the prices of securities than fixed rate debt securities. Credit risk Investors are exposed to the risk that an issuer of floating rate bonds may default on making its payment obligations, thereby effecting the Fund s value. Concentration risk The Fund s investments will be concentrated in a relatively small number of securities, from a relatively small number of issuers within the Australian banking industry. There is potential for the overall returns on the investment portfolio to be adversely affect due to the poor performance of only one or a few of the issuers or securities held in the index. Index tracking risk The Fund should not be expected to track the performance of the Index exactly, but generally aims to minimise any deviation from the Index. Quantitative Performance Analysis The Fund commenced in June As Lonsec prefers to consider performance over longer time periods, it will continue to monitor the performance of the Fund as a more significant track record develops.

5 ISSUE DATE P 5-5 ANALYST: MICHAEL ELSWORTH APPROVED BY: LIBBY NEWMAN Glossary Total return Top line actual return, after fees Excess return Return in excess of the benchmark return Standard deviation Volatility of monthly Absolute Returns Tracking error Volatility of monthly Excess Returns against the benchmark (the Standard Deviation of monthly Excess Returns) Sharpe ratio Absolute reward for absolute risk taken (outperformance of the risk free return (Bank Bills) / Standard Deviation) Information ratio Relative reward for relative risk taken (Excess Returns / Tracking Error) Worst drawdown The worst cumulative loss ( peak to trough ) experienced over the period assessed Time to recovery The number of months taken to recover the Worst Drawdown Snail Trail A trailing 12-month relative performance and relative risk measurement over the benchmark. The trail is generated using a 12-month rolling window over the specified period 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. 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