Product Review BetaShares WisdomTree Japan ETF Currency Hedged

Transcription

1 Product Review BetaShares WisdomTree Japan ETF Currency P 1-6 ANALYST: BENJAMIN O SHEA APPROVED BY: SIMON BAIRD ISSUE DATE Key information FUND MANAGER ASSET CLASS SECTOR SUB SECTOR INVESTMENT TYPE PDS OBJECTIVE UNDERLYING FUND INDEX PROVIDER UNDERLYING INDEX BETASHARES CAPITAL LTD GLOBAL EQUITIES GLOBAL LARGE CAP STRATEGY - PASSIVE EXCHANGE TRADED FUND (ETF) LISTED ON THE AUSTRALIAN SECURITIES EXCHANGE TO TRACK THE PERFORMANCE OF THE WISDOMTREE JAPAN HEDGED EQUITY INDEX, HEDGED TO AUD BY THE RESPONSIBLE ENTITY, BEFORE FEES AND EXPENSES. WISDOMTREE JAPAN HEDGED EQUITY FUND WISDOMTREE INVESTMENTS, INC WISDOMTREE JAPAN HEDGED EQUITY INDEX DERIVATIVE USE ALLOWED IN LIMITED CIRCUMSTANCES BUT CANNOT BE USED TO LEVERAGE THE FUND SECURITIES LENDING THE FUND DOES NOT USE SECURITIES LENDING ASX LISTING DATE MAY 2016 DISTRIBUTION FREQUENCY FUND SIZE Fees MANAGEMENT COSTS EXPENSE RECOVERY FEES Daily trading information TICKER SEMI-ANNUAL $79.95M 0.51% P.A. CAPPED AT 0.07% P.A. HJPN 52 WEEK LOW $ WEEK HIGH $15.11 LAST PRICE $13.50 LAST NET ASSET VALUE (NAV) $13.58 PREMIUM / DISCOUNT TO NAV (DAILY) % AVERAGE DAILY TRADED VOLUME 51,227 AVERAGE DAILY TRADED VALUE $763,140.8 Top 10 holdings WISDOMTREE JAPAN HEDGED EQUITY ETF 100% 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 By investing in units of the NYSE-listed WisdomTree Japan Equity Fund, the Fund gains access to a large pool of assets and liquidity. The Index Provider is very experienced in the smart or alternative beta field. The Fund is currently the only currency hedged Japanese equity ETF listed on the ASX. Weaknesses Fees are considered to be in the mid to high range for smart beta style products and funds offering Japanese equity market exposure. 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 ASFA/FSC guidelines. Features and benefits COMPLEXITY ESG AWARENESS Fee profile FEES VS. UNIVERSE FEES VS. ASSET CLASS FEES VS. SUB-SECTOR LOW MODERATE HIGH LOW MODERATE HIGH Fee BIOmetrics are a function of expected total fee as a percentage of expected total return. 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: SIMON BAIRD ISSUE DATE What is this Fund? BetaShares, ( The Manager ) adopts a passive investment strategy in managing the BetaShares WisdomTree Japan ETF Currency ( HJPN or the Fund ). The Fund is designed to track the performance of the WisdomTree Japan Equity Index (or the Underlying Index ) before fees and expenses. The Fund is a domestic domiciled vehicle that gains exposure to the Underlying Index by investing in the NYSE-listed equivalent ETF; the WisdomTree Japan Equity Fund (NYSE:DXJ) (the Underlying Fund ). The Fund is currency hedged, which reduces but not eliminates, the risks associated with movements between the AUD and the Japanese YEN in which the Underlying Index constituents are denominated. The Fund invests into the Underlying Fund which is currency hedged to USD and BetaShares executes the AUD/USD leg of the hedge using one month currency forwards. WisdomTree Investments, Inc ( WisdomTree, or the Index Provider ) is a pioneer in the concept of fundamentally weighted indexes (rather than more commonly used market capitalisation weighted indexes), sometimes referred to as smart beta indexes. WisdomTree believes fundamentals like dividends or earnings offer more objective measures of a company s health, value and profitability than stock price alone. The Underlying Index uses dividends to weight constituents, with weights based on dividends paid over the prior annual cycle. Companies that pay a greater total dollar amount of dividends are more heavily weighted. The Underlying Index also seeks to include globally competitive companies and includes an export tilt to capture this companies must derive at least 20% of their revenue from countries outside of Japan. This indexing approach typically results in the Fund exhibiting some sector exposure differences relative to a market capitalisation weighted index underweight financials, overweight industrials and consumer staples (though this may change over cycles). The Underlying Fund s portfolio as at December 2017 comprised 399 securities with approximately 30.8% in the top 10 holdings. Sector bias is tilted to Consumer Discretionary (24.9%) and Industrials (23.3%) securities. 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 Japanese equity product and as such will generally sit within the growth component of a balanced portfolio. Lonsec considers the Fund to be suitable for blending with other global equity strategies. 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 Established in 2009, BetaShares is a specialist provider of ETFs with approximately $5.3 billion in funds under management (FUM) across 44 exchange traded products as at February BetaShares employs four portfolio managers (all located in Sydney, Australia) in addition to 37 other sales and other staff. Lonsec believes BetaShares' resourcing is sufficient for the current number and type of products managed. The Underlying Fund is managed by WisdomTree Investments, Inc., the industry's seventh largest (by AUM) ETF provider in the US. WisdomTree has a long history in 'smart beta' index solutions and Lonsec believes they are well qualified to manage the Underlying Fund. WisdomTree is listed on the NASDAQ under the ticker WETF and as of January 2018 has a market capitalisation of $1.8bn ($US). Given the Fund s returns are driven by a mostly rules-based investment process, the active management decision that often rests with an individual portfolio manager is significantly reduced. As such, key person risk for the Fund is lower compared to that of an actively managed fund. Overall Lonsec has upgraded the Fund to a Recommended (Index) rating. The Fund offers investors a 'smart beta' type exposure to Japanese equities. The Underlying Index has been developed by WisdomTree, one of the largest ETF providers in the US (and globally), and Lonsec believes the methodology used to capture risk premia is based on solid academic research. Lonsec's increased conviction in the Fund stems from the development of a longer performance track record (inception May 2016), and gaining more comfort with the investment and currency hedging structure adopted by the Manager to closely replicate the returns of the Underlying Index. People and Resources BetaShares Holdings was established in 2009 as a specialist provider of exchange traded products. It is 51% owned by Mirae, 46.5% owned by BetaShares management team and the remainder owned by private investors. Mirae is a Korean based asset management entity with over $120bn of FUM. Mirae is particularly active in emerging market equities and is currently expanding its ETF platform globally. The Mirae family of ETFs has US$30bn-plus in assets in ETFs listed across six countries. BetaShares has over $5.3bn of FUM across 44 ETF products as at February 2018.

3 P 3-6 ANALYST: BENJAMIN O SHEA APPROVED BY: SIMON BAIRD ISSUE DATE Size and experience NAME LOUIS CROUS POSITION SENIOR PORTFOLIO MANAGER & CIO EXPERIENCE INDUSTRY / FIRM 17 / 7 THONG NGUYEN PORTFOLIO MANAGER 13 / 6 DON HOANG CHAMATH DE SILVA ASSISTANT PORTFOLIO MANAGER ASSISTANT PORTFOLIO MANAGER 7 / 3 8 / 1 The BetaShares business currently employs 41 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, Mirae. The Underlying Fund is managed by WisdomTree which has $48.0 billion (USD) in AUM as of January Investment Approach Overview The Fund invests into units of the Underlying Fund which is passively managed and WisdomTree, as an index-based ETF provider, aims to deliver investment returns that closely match those of the Underlying Index before fees and expenses. WisdomTree predominantly employs 'full replication' portfolio construction, whereby all the constituents of the Underlying Index are held at their exacts weights in the Underlying Fund. The Underlying Fund is currency hedged by WisdomTree (i.e. Japanese YEN to US Dollar). The currency hedging aspect of this Fund is managed by BetaShares by rolling one-month forward contracts of the Australian against the US Dollar. Underlying index The Underlying Index constituents must be dividend paying companies domiciled in Japan and traded on the Tokyo Stock Exchange. Companies must have at least $100 million market capitalisation, have had an average daily trading volume of at least $100,000 for the prior three months, derive at least 20% of their revenue from countries outside of Japan (WisdomTree outsources this calculation), and have paid at least $5 million in gross cash dividends on shares of their common stock in the annual cycle prior to a reconstitution. Constituents are weighted in the Index based on annual cash dividends paid. The Index also has maximum single security limit of 5%. However, in response to market movements, weights may fluctuate above caps between the annual rebalancing dates. Transparency BetaShares website is both comprehensive and user-friendly. It is designed as a self-service website with information relating to performance and current holdings for all BetaShares ETFs. Liquidity The Fund did not trade on the ASX on 4 out of the previous 250 days to November 2017 and at present, has $80.0m in Funds under Management (FUM). Whilst these metrics are mid-range of the peer group, excellent liquidity in the Underlying Fund ($9.2bn USD fund) assists in making the liquidity profile of the Fund 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. The Fund's underlying holdings represents mostly large- and mid-cap securities listed on the Japanese equity market. Investors should be aware that during normal market conditions, liquidity for these securities will not be a concern; however in times of market stress, some securities may experience more challenging liquidity conditions. Fees and Indirect Costs The Fund s Management Costs of 0.58% p.a. (Management Fee of 0.51% p.a. and Expense Recovery Fee capped to 0.07% p.a.) to be higher than the peer group average for a passive exposure to Japanese largeand mid-cap equities. This said, peers generally track a market capitalisation weighted index which can have greater cost efficiencies available (i.e. future contracts). The one-year average Bid / Ask Spread to November 2017 of the Fund was mid-range in the peer group at 0.23% p.a. Fee comparison FUND NAME BETASHARES WISDOMTREE JAPAN ETF CURRENCY HEDGED (HJPN) MER (% P.A.) BID/ASK SPREAD (%)* ISHARES MSCI JAPAN ETF (IJP) UBS IQ MSCI JAPAN ETHICAL ETF (UBJ) *Average one-year Bid / Ask Spread to 30 November 2017 (Source: ASX). Performance The Fund was launched by BetaShares in May 2016, however the Underlying Fund has a long history of tracking the WisdomTree Japan Equity Index closely. Due to the Fund's investment process whereby it buys and sells units in a US-listed ETF that holds Japanese securities, there is expected to a reasonable amount of variance in day-to-day returns and a high Tracking Error between the Fund and the Underlying Index (owing to a timing mismatch between the time of last trade and timing of NAV for the Underlying Index). However, this is expected to reconcile from one trading day to the next, and Lonsec believes so far the Fund has overall delivered returns that adequately track the performance of the Underlying Index.

4 P 4-6 ANALYST: BENJAMIN O SHEA APPROVED BY: SIMON BAIRD ISSUE DATE 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 Fund Prospectus 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. Performance risk The value of, and returns (if any) from an investment in the Fund will depend upon the performance of the underlying investments. There is no guarantee the value of an investment in any underlying investment 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. 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. Currency risk The Fund invests in assets that are denominated in Japanese YEN but are currency hedged to the US Dollar by WisdomTree. BetaShares then aims to fully hedge the US Dollar returns of the Underlying Fund to the Australian dollar, however these processes may not eliminate the effects of foreign exchange movements. Further information Further information can be obtained by calling BetaShares on or visiting

5 P 5-6 ANALYST: BENJAMIN O SHEA APPROVED BY: SIMON BAIRD ISSUE DATE Quantitative Performance Analysis - annualised after-fee % returns (at ) Performance metrics 3 MTH 6 MTH 9 MTH 12 MTH TOTAL RETURN (% PA) STANDARD DEVIATION (% PA) * EXCESS RETURN (% PA) WORST DRAWDOWN (%) TIME TO RECOVERY (MTHS) NR NR NR NR TRACKING ERROR (% PA) * FUND: BETASHARES WISDOMTREE JAPAN ETF - CURRENCY HEDGED BENCHMARK USED: WISDOMTREE JAPAN HEDGED EQUITY TR INDEX * PERIODS LESS THAN 12 MONTHS ARE NOT CALCULATED TIME TO RECOVERY: NR - NOT RECOVERED, DASH - NO DRAWDOWN DURING PERIOD Growth of $10,000 over one year Premium/discount to NAV over one year Monthly excess returns over one year Traded Volume and FUM

6 P 6-6 ANALYST: BENJAMIN O SHEA APPROVED BY: SIMON BAIRD ISSUE DATE 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 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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