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Pinnacle makes ETF debut with SAVE and Z3RO

Pinnacle Investment Management have been quietly becoming a major player in the listed investment space. Pinnacle have recently diversified into their own listed investments under their own brand, starting with two active ETFs under their new Pinnacle aShares brand. The ETFs in question are Pinnacle aShares Global Dynamic Income Fund (SAVE) and Pinnacle aShares Dynamic Cash Fund (Z3RO). Today we take a look at their two new ETFs.

By ETF Watch - Oct 25, 2019

They may not be a household name, but Pinnacle Investment Management have been quietly becoming a major player in the listed investment space. Listed on the ASX, Pinnacle’s core business model involves taking equity stakes in successful investment managers, and taking over control of their distribution and operations. Some of the brands in their stable include Antipodes, Plato, Spheria and Metrics, all of which have their own Listed Investment Companies (LICs) on the ASX under the tickers APL, PL8, SEC, MXT.

Pinnacle have recently diversified into their own listed investments under their own brand, starting with two active ETFs under their new Pinnacle aShares brand. The ETFs in question are Pinnacle aShares Global Dynamic Income Fund (SAVE) and Pinnacle aShares Dynamic Cash Fund (Z3RO). Today we take a look at their two new ETFs.

Active ETFs with outsourced but kind of insourced management

The first thing to note is that whilst SAVE and Z3RO are traded like other ETFs on the ASX, they are active in nature. Active ETFs attempt to outperform an index, rather than simply track an index. They are the minority on the ASX, but are a growing sub-segment of the ETF market.

Additionally, whilst Pinnacle are promoting these ETFs, the active management is actually outsourced to Omega Global Investors, one of the fund managers in the Pinnacle stable. We don’t see this as an issue, and it makes sense for Pinnacle to utilise the skills of one of their affiliated fund managers to make the investing decisions.

Omega Global Investors manage these funds with a rules based approach. We believe this is similar to how a number of Smart Beta ETFs are managed (in fact the Product Disclosure Statements call this approach ‘smart beta plus’), with a set of rules that the portfolio tracks. This presumably is a more hands off approach than many active funds, and likely helps keep fees low.

Pinnacle aShares Global Dynamic Income Fund (SAVE)

According to Pinnacle, SAVE is a “globally diversified income active ETF with bond like stability and equity like returns”. SAVE is targeting investors who are seeking consistent and steady dividend yield, aiming to provide investors of the current RBA Cash rate plus 4%.

SAVE has a unique difference compared to most income focused ETFs on the ASX. Generally an income focused ETF will focus on a single sector, such as bonds, high yielding shares or property and infrastructure. SAVE however is diversified across numerous asset classes, which avoids income seeking investors being over-exposed to a single sector. Further, the asset allocation is dynamic, meaning the investment manager has control to alter the allocation in order to optimise investor outcomes.

The maximum sector allocation of SAVE is 20%, with  the typical percentage of equities in the portfolio of 40-80% and percentage of bonds of 20-60%. At least 5 countries must be represented in the portfolio holdings.

Through its diversification and active control over asset allocation, Pinnacle claims that SAVE has roughly half the equity market risk of the broader market, offering investors access to yield with lower market volatility.

SAVE has management fees of 0.65% per annum, which is on the low side for active management. It was launched in August 2019, and currently has around $6 million under management.

Pinnacle aShares Dynamic Cash Fund (Z3RO)

Z3RO is Pinnacle’s foray into the Cash ETF space. Unlike most cash ETFs that are passive in nature, Z3RO is also actively managed, meaning the fund manager is aiming to outperform Australia’s now record low cash rate.

The active management of Z3RO involves a minimum allocation to cash and certificates of deposit of 70%, and a maximum allocation to bonds and other short term money market instruments of 30%. It is presumably through this 30% allocation that Z3RO will attempt to provide investors with some out-performance for their cash holdings.

Z3RO’s real differential, at least from a marketing perspective, is that it has no management fees. Zero management fees are becoming popular in more mature ETF markets such as the USA, where issuers offer no fee ETFs as a loss leader to promote their brand.

Whilst Z3RO may not have management fees, this does not tell the whole story. It has recoverable expenses of up to 0.15%, which at least for an investor are a fee that will be payable by them. Recoverable expenses tend to fall as funds under investment grow, and Pinnacle claim that once Z3RO reaches scale they will fall to 0.05%, which would place it as the lowest cost Cash ETF on the ASX. However, with only $5m under management at the moment, the point of scale appears some way off.

What else is available on the ASX like SAVE and Z3RO?

There are a number of yield focused ETFs available on the ASX, however, as we pointed out earlier, they all tend to focus on yield within a single sector. This places SAVE in a unique position of providing cross sector diversification in a single yield focused ETF.

In the cash ETF space, there are now a number of cash ETFs available. Refer to this previous post for a summary of these . Z3RO’s actively managed point of difference may appeal to investors who are looking to squeeze a little bit more out of their cash returns, however time will tell how much additional return Z3RO can provide in such a low rate environment.

You can find a full list of Cash and high yield ETFs in the ETF Watch Fund Database.

It’s great to see more innovation in the ETF space, and new players enter the industry. We’re sure with Pinnacle’s large stable of fund managers this will not be their last ETF and look forward to seeing what they have to offer next!

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