Following the January launch of joint mutual-funds trading by Deutsche Börse and its international central securities depository Clearstream, the service is being rolled out across Asia and could pose a significant challenge to traditional distribution channels.
Funds trading had been possible using Deutsche Börse's cash market platform, Xetra, since 2006, but only for a limited number of mutual funds. The new offering provides access to virtually all cross-border funds.
In addition, last week, Singaporean funds were made available for order routing, settlement and custody on the Clearstream order-routing platform Vestima. These are the first Asia-domiciled funds available on the platform. Hong Kong funds are awaiting local regulatory approval and then they, too, will be available.
Clearstream offers some 82,000 funds (mostly Luxembourg-domiciled), including 96% of the 5,300-odd funds registered for distribution in the Asia-Pacific region. There is €1billion of daily net inflows into Luxembourg-domiciled funds, of which €200 million comes from Asia-Pacific-based investors.
The launch of exchange trading of mutual funds is set to shake up the mutual-funds industry in the region, as it should prove particularly attractive to Asian investors, who are more short-term orientated than their European counterparts.
An Asian investor’s average holding period for a mutual fund is three to six months, as compared to two years for a European investor, noted Philippe Seyll, head of investment funds services at Clearstream in Luxembourg, during a stop-off in Hong Kong as part of a five-city Asian roadshow.
Xetra allows mutual funds to be bought and sold just like stocks or exchange-traded funds (ETFs), and at almost a fifth of the cost of using traditional distribution channels. An order for €10,000 of funds would incur a cost of €500 using a traditional distributor, but €122.30 through Xetra.
That is still a lot higher than the cost of buying an ETF on Xetra (€19.10 for an order worth €10,000), reflecting the higher cost of running mutual funds, which are actively managed. Still, investors will need to be careful before trading mutual funds in an overly short-term fashion, given the expense involved.
"We are not specifically encouraging investors to trade short-term, but the new system could indeed lead to more frequent trades," says Seyll. "We believe the impact will be limited. With regard to the impact on performance, this could be an encouragement to make the distribution cost to adapt to those new practices."
The lower cost of buying through Xetra also reflects the fact that investors are not paying for advice on their purchases. That cuts both ways, however: buying directly removes any concern that a distributor is pushing a fund that will bring it the biggest fee, as opposed to the best fund for the customer.
An additional benefit of the platform is that non-European investors will not need to wait until the next business day for their trade of a European fund to be executed, says Seyll; fund units will be priced and monetised immediately.
Mutual-funds trading is also likely to accelerate the usage of mutual funds as collateral, says Seyll, since they are AAA-rated and they remove concerns about refinancing where cash has been posted as collateral. The speed of exchange trading will also facilitate this, he adds. Previously, mutual funds were not always suitable to use as collateral, given the time needed for buying and selling them. (In January, Clearstream added investment funds to its portfolio of asset classes eligible for use as collateral.)
In addition, the launch of new funds will be quicker and easier with the benefit of the new platform, as there will be no need to negotiate commissions and fees with distributors, and a big sales network is already available, says Jochen Thiel, Frankfurt-based executive director of Xetra Market Development – retail trading.