Q7: What is a managed fund?

Dive into the pool with other investors and share the benefits of scale

You’ve seen the advertisements for these investments, whether or not you recognised them as managed funds. The media has no shortage of fund manager advertising and in the main they’re showing off their managed fund products.

Managed funds (our US cousins call them “mutual funds”) involve pooling investors’ funds and, with the expertise of professional managers and the cost savings that arise from managing large amounts of money, investing in particular types of assets. Remember from our first post that there are a number of different asset classes in which you can invest: cash, bonds, shares, property, and others. Managers of these pooled funds will create funds with particular investment goals which invest in one or more of these asset classes, or combinations of them. Examples include

• cash
• Australian government bonds
• global government bonds
• global corporate bonds
• Australian large company shares
• Australian small company shares
• Australian high dividend yield shares
• global, or regional, shares
• global REITs
• emerging markets shares
• global infrastructure
• balanced multi-class investments

The list is potentially endless and these funds are created and offered not only by the biggest names in global finance but by small, “boutique” managers who have specific expertise in specialist investment markets.  The fund managers offer these different products to cater for a wide range of investor requirements. Of course they charge a fee for these products, which varies depending on the type and structure of the investment. These funds are heavily regulated in Australia and can only be sold by issuing a Product Disclosure Statement to potential investors. This gives an additional layer of regulatory oversight, but by no means gives a guarantee that the funds will achieve their stated objectives every year.

The legal structure of these products is one of a unit trust. Your dollar investment purchases units in the trust at the current unit price, which is calculated regularly by the manager of the fund. When you move money in or out of the fund you buy or sell units. When you do transact with the fund it is directly with the manager of the trust.

Benefits of managed funds

The most significant benefit of managed funds is that they allow the small investor to take ownership of a very broad range of investments. Take, for example, an investor with $10,000. If they were to buy shares in individual companies directly, at most they’d be able to buy small holdings in about five companies. With a managed fund the same $10,000 could achieve ownership in all the largest 200 companies in Australia or around 4,000 companies in a global small companies fund. This increases the diversity of the investments and has the effect of reducing some of the risks of holding individual shares.

A managed fund has professional money managers working to achieve the best results for investors. Some money managers have a global team of analysts performing research, visiting factories and mines and meeting with senior company officials to gain better insights into the companies in which they invest. This is something an ordinary investor couldn’t possibly do on their own.

For a small investor the managed fund structure offers a great deal of convenience since investments or redemptions can be made easily. You also don’t need a lot of money to start investing in a mutual fund: typical minimums are around $2,000. Due to the range of investments that a mutual fund can make, it can also be a handy way for a small investor to get access to a well-diversified portfolio of global investments.

Things to be aware of

A fund manager isn’t a charity, so it’s going to charge you a fee for looking after your money. One of these fees is often called the Management Expense Ratio, or MER. This is a fee charged as a percentage of the money you have in the fund. It is charged whether or not the fund achieves its performance target, or even if your investment loses value. The size of the fee generally depends on the complexity of the investment. The MER is the biggest drag on the performance of your investment and you should carefully consider the fee being charged before you invest. Other fees may include an entry fee when you add new money or an exit fee when you withdraw it. Some funds may charge a performance fee where, if the fund achieves a certain return target, the manager will charge additional fees (sometimes quite large amounts). These fees aren’t paid in cash, but are recovered from your investment by reducing the value of your holdings.

As you might know, the mantra of the investment industry is “Past performance is not a reliable indicator of future performance”. No fund manager can guarantee the performance of their investments so do bear in mind that, no matter how well a manager has done in the past, what happens in the future is unpredictable.

Depending on the structure of the fund it may be that your investment can’t be redeemed when you need your money back. Some funds may have a lock-in period or may have a delay between a request to redeem and the payment back to you. Look closely at any restrictions on the availability of your money before you invest.

If you like to have control of your investments and the companies you’re invested in then consider that a managed fund’s investments are decided by the managers. If you’re keen on a particular company or have an objection to a certain firm’s business tactics your manager may not share your views. You are giving up a level of control when you invest in a managed fund.

Overall

In general the benefits of managed funds, particularly for the small investor, are large. An advisor can point you to the funds that suit your investment objective, your fee budget and your risk profile and build a portfolio of investments that can help you to achieve your investing goals.