Industry-wide adoption of the Australian Securities Exchange (ASX) Managed Funds Service (AMFS) could save up to $215 million a year in transaction costs, according to Rice Warner Actuaries.
A Rice Warner report, Managed Funds Transaction Cost Research: Impact of ASX Managed Funds Service, concludes that the service could lead to savings of between 35 per cent and 50 per cent of the transaction costs currently incurred between parties involved in trading managed funds.
The AMFS is an extension of the ASX’s Aqua project and uses the established CHESS system to facilitate trades. It replaces the current, largely paper-based application and redemption process, and provides greater certainty on unit prices for investors buying into and selling out of managed funds.
A director of Rice Warner, Richard Weatherhead, says the report’s findings should be regarded as indicative.
“The millions of dollars of savings assume that the whole managed funds industry adopts the service, which they are not going to do,” he says.
“But the idea of quoting those costs is to say that there will be substantial savings.”
Weatherhead says the AMFS represents “an opportunity for fund managers and platform providers to look for a technology-based solution to enable them to meet more stringent cost objectives”.
Weatherhead says that not all managed fund providers, platform operators and brokers may end up using the ASX system.
“There are alternatives out there,” he says.
“But a lot of the platforms will have ASX 300 shares available anyway. A lot of the infrastructure is in place. It’s a relatively small step to adopt the AMFS. There are some transition costs, because it’s not the same exchange. But [the ASX’s] competitive advantage is that they already have incumbent clients.”
The Rice Warner report identified a wide variation in current transaction costs under the current system, with figures ranging from $11 to $45 per transaction depending on the process used, to apply for or redeem managed fund investments (see table).
| Application costs | Redemption costs | |||||||
| Process | Current | AMFS | Saving in $ | Saving as % | Current | AMFS | Saving in $ | Saving as % |
| Direct to fund | $27.50 | $17.60 | $9.90 | 36.0% | $30.50 | $17.60 | $12.90 | 42.3% |
| Via broker | $42.80 | $17.60 | $25.20 | 58.9% | $45.50 | $17.60 | $27.90 | 61.3% |
| Via platform | $42.80 | $17.60 | $25.20 | 58.9% | $45.50 | $17.60 | $27.90 | 61.3% |
| Via adviser | $42.80 | $27.60 | $15.20 | 35.5% | $45.50 | $27.60 | $17.90 | 39.3% |
| Via custodian | $42.80 | $17.60 | $25.20 | 58.9% | $45.50 | $17.60 | $27.90 | 61.3% |
| Source: Rice Warner Actuaries. Percentage savings calculated by I&T News | ||||||||
“Estimating the cost savings that the industry could potentially benefit from using the AMFS is not easy as there are no reliable sources of industry information regarding managed funds transaction volumes,” the report said.
“However, by combining relevant industry statistics with our own knowledge of the market we are able to roughly estimate that it cost the industry between $290 million and $430 million to process managed funds transactions in the 2011 calendar year.
“If the entire market utilised the AMFS, we estimate that the industry-wide transaction processing costs could potentially have halved to between $145 million and $215 million.”
Rice Warner acknowledged that its estimates were probably “an overstatement of the actual industry-wide savings”, because it was unlikely every single managed fund transaction would be conducted through AMFS”.
“However, it shows what the potential cost savings could have been in 2011,” the report said.
