Smart Investor: Getting Started, May 2011

Understanding managed funds.

The idea of a managed fund is to get the professionals to do your investing for you. When you buy a managed fund, your money is pooled together with many other investors into a single vehicle. Then a professional fund manager does the investing for you and the others in the fund.

Managed funds are available over a host of different assets: Australian shares, international shares, local and international fixed income (bonds and so forth), property, and numerous more esoteric alternative asset classes.

Making life easy

People like managed funds for two main reasons. One is that they are an easy way of getting diversification. If you wanted to get a diversified portfolio of Australian shares you’d probably be looking at making at least 20 separate investments. Buying a managed fund exposes you to a portfolio of investments for just one purchase.

The other is that investing can be a time-consuming job: staying on top of the opportunities available in the market, and knowing when is best to buy or sell, is beyond most of us with full-time jobs. Giving the responsibility over to a trained professional makes a lot of sense.

There are other advantages too. One is administrative: at tax time, it’s a lot easier to account for a fund than a host of individual shares, partly because there’s just one fund to account for and partly because the fund manager supplies the information you need. Additionally, they help you get exposure to asset classes you otherwise would find difficult to reach – international bonds, for example – and they can be useful for making regular contributions.

The downside

As with all things, there is a flip side. Fund managers charge a fee, which will typically be higher than investing yourself – naturally, as your manager needs to be remunerated for his or her expertise. Also, it’s not as easy to buy and sell a managed fund as it is a share. That’s not to say it’s difficult, but it’s certainly not as quick as pressing a button to sell your shares and watching the trade go through in seconds. Finally, although there are plenty of good fund managers, there are also plenty who are not – picking the best manager is a major exercise in itself.

So how do you buy a managed fund? Well, before you do so, check a couple of things out. Each managed fund has a product disclosure statement, which you should be able to find on the fund manager’s web site (or your investment platform, if that’s how you’re investing). This will tell you in detail about the fund, its investment process, its fees and so on.

Also, you might want to check how it’s been doing: independent researchers like Morningstar collate data on returns from the short to the long term for Australian funds. Be wary, though, of going for the fund that has shot the lights out in the last six months: very often the winner one year is a loser the next. Look to the long term.

When you buy a managed fund, you are actually buying units in that fund. Those units have a price which moves up and down like a share from day to day. Minimum investments vary but are typically around $1,000. Increasingly, buying and selling of managed funds is done through an investment platform like a wrap or a mastertrust – these will be covered next month.

How much?

There are several possible layers of fees involved in managed funds. One is an entry fee, or contribution fee, which can be as much as 4%, although that is something you can negotiate with the financial planner who is putting you into the fund. Then there is the management fee, which might be less than 1% for a passive fund (one that just follows the index rather than taking active bets) or as much as 2.5% in a specialist asset class. And some have performance fees, which are very important to understand: under what circumstances is a performance fee paid? Does a fund have to recoup previous losses before it can earn a new performance fee?

One important thing to understand is the circumstances in which you can get your money back out of a fund. Some funds charge fees for withdrawals (though this is becoming more rare); and funds vary on how much notice you have to give the manager before redemption, or how often you can redeem. In the financial crisis, some funds suspended redemptions, meaning people couldn’t get their money out even if they wanted to. That, clearly, is to be avoided.

Box: Keeping track

There are several ways of seeing how your fund is doing.

1. Performance reports. Funds have to give you a statement and report at least once a year, and most do so at least once a quarter, often including some market commentary or a list of top holdings along with your performance numbers.
2. Check out unit prices in publications such as Smart Investor or the Australian Financial Review.
3. Compare performance numbers for funds on a research web site like www.morningstar.com.au
4. If you become suspicious about the probity of a fund manager, ASIC has comprehensive lists of people and institutions that are banned and suspended. ASIC’s consumer website, moneysmart.gov.au, is also a useful source of advice.

Popularity: 1% [?]