Step by step guide to managed
funds
What you'll learn in this step: An understanding of
managed funds and how they operate.
Managed funds - also known as unit trusts - are vehicles that
allow you to pool your money with a number of other investors into
a single fund that then is able to invest in assets that might
otherwise be out of your reach. Managed funds are what they say -
funds managed for you by others - namely, investment professionals
such as fund managers. Managed funds can invest in a variety of
assets including shares, property and fixed interest or a
combination of these. All managed funds have a prospectus which
allows you to see where it is investing.
Learn more: Managing the funds lingo,
Sydney Morning Herald, 8 Aug 2001
OK, let's start with one that's always bothered me. Why are some
called funds and others trusts?
Why invest in a managed fund?
The attraction of managed funds is the diversification they
offer. If you wanted to invest in shares but only had $1,000,
realistically you could only invest in one company. If the company
performs badly, you could lose your money. But if you invest that
money in a managed fund, depending on the fund's profile, you may
have an interest in 10, 20 or even 50 Australian or international
companies. The same applies to property trusts. You may want an
exposure to property in your portfolio but cannot afford to buy a
house. If you invest in a property trust, then depending on the
sector it invests in, you can have exposure to major shopping
centres, CBD office blocks, or a leisure resort.
Investing in a managed fund also gives you the benefit of a
professional fund manager. Fund managers have access to much more
research than the average investor and presumably a better
knowledge of investment markets. Of course, you won't necessarily
have the control to choose the individual investments made by the
fund manager, but with thousands of managed funds now on the
market, you'll certainly be able to choose a fund that reflects
your risk profile and closely mirrors the choices you might
yourself have made. However, be aware that not all fund managers
make money for their investors. You need to do your own research to
ascertain how comfortable you are with a fund manager's approach to
investing.
If you decide to invest in managed funds using a regular savings
plan, because you are contributing a set amount each month, managed
funds are also a simple and convenient savings vehicle.
How much do I need to invest in a managed fund?
Usually you need to invest a minimum amount of $1000 to buy into
a managed fund although some let you start your investment with as
little as $500, especially if you also commit to a regular savings
plan where you add to your investment on a monthly basis from as
little as $100.
When you invest in a managed fund, you are buying units of equal
value in the fund. If the value of the investments owned by the
fund rises, then so too does the value of your units. If the value
of the investments fall, then so too does the value of your units.
The value of the units that you have invested in at any time is the
market value of the fund's investments divided by the number of
units issued, less any debt. This is known as the net asset
value.
Types of managed funds
Managed funds can be both listed and unlisted. Those that are
listed can be traded on the stockmarket and have a market value
that is determined by supply and demand. These funds tend to be
closed - that is, there is a finite number of units on issue.
Non-listed funds can be either open or closed. If they are open,
new units are issued to meet demand with a new prospectus released
every six months or so. Unlisted funds are valued at least weekly,
if not daily, by the fund manager. The value is calculated by
dividing the current value of the total assets plus either the
buying or selling costs by the number of issued units. If you want
to sell your units in an unlisted fund, you need to contact the
fund manager who will have set out in the prospectus how quickly
you can access your money. It is usually no more than two weeks and
often within days.
Case study
Marcus is a lucky guy. He's single, in a good job and he recently
inherited a house. In the past six months, Marcus' life has changed
dramatically. He is now in the enviable situation of having a flow
of extra cash, and he wants to maximise this.
Read the full case
study, The Age, 12 Feb 2001 |
Learn more: Making money made easy,
Sydney Morning Herald, 9 Aug 2000
Why spend precious time worrying about which stocks fit best in
your portfolio when the experts can do it for you?
Points to consider
Not all managed funds make money for their investors and one
point that is constantly hammered home is that past performance is
no indication of future performance. The top performer from last
year is rarely the top performer two years in a row.
You also have to be aware that you do not dictate where your
money is invested so it is essential you choose a fund that closely
matches the companies or industries you are keen to invest in.
Don't forget that managed funds attract fees and charges and
these vary from fund to fund. Some charge an entry fee and no exit
fee, some charge the reverse while others don't charge any fees.
You need to familiarise yourself with all fees so you don't get a
shock when your statement comes. The time to ask questions is
before you invest.
Learn more: Understand the effect of capital
gains tax on managed funds, Sydney Morning Herald, 31 Jan
2001
To understand the effect of capital gains tax on managed funds. Is
that so difficult? Why should they be any different from other
investments, such as shares?
Calculate your capital
gains tax
Tax treatment
When you get a statement from your managed fund, it will itemise
your tax liabilities on the distributions you have received.
Distributions comprise both income from dividends and interest and
income from the sale of assets (capital gain). Dividend income is
taxed at your marginal tax rate. If the dividends have been
franked, you will receive franking credits. Don't forget to include
the distributions you receive in your annual tax return.
You will be taxed on just 50 per cent of the capital gain
component of your distribution if the fund owned the asset for more
than a year. The statement does not include any capital gains you
may have made if you disposed of any of your investment.
Learn more: A lever under the ATO,
Sydney Morning Herald, 8 Aug 2001
Those who possess a natural aversion to tax may be interested in
like-minded funds, writes Leeanne Bland.
Fees
Costs of investing in managed funds vary but usually involve
entry and exit fees and an annual management charge.
Learn more: Watch out
for the fee trap, Sun Herald, 7 Aug 2000
Investors often get caught in the hype surrounding the more
prominent fund managers as they blow their trumpets about beating
the index by 20 per cent.
Entry and Exit fees
Entry and exit fees can range from nil up to 5 per cent
depending on the type of fund you select. Cash management trusts
and mortgage trusts typically have no fees. However, international
shares tend to attract a higher fee. The situation of charging
entry and exit fees is changing with the introduction of discount
brokers (such as InvestSMART,
a subsidiary of Fairfax Digital Limited) who generally rebate the
fee. Advisers also tend to rebate the fee if you buy units through
them.
Not all managed funds charge exit fees. Some reduce exit fees
depending on the length of time you keep your money in the fund,
usually eliminating the fee entirely if it is more than five years
but charging around 5 per cent if it is less than a year.
Some managed funds offer lower entry fees but higher ongoing
fees. If you are planning on investing for the long-term, it can be
better to pay a higher entry fee upfront.
Ongoing fees
This fee is an annual charge that covers the cost of the fund
manager's services, administration fees and the commission paid by
the managed fund to the third party with whom you dealt with to buy
into your managed fund. The Investment and Financial Services
Association requires fund managers to publish a fee that
encompasses all costs, so investors can more readily compare apples
with apples. This figure is called the Management Expense Ratio
(MER). Ongoing fees vary depending on your choice of investment.
The MER on cash funds is usually much lower than the MER on
international share funds. This is because monitoring international
share investments involves greater input from the fund manager. The
range is approximately 0.5 up to 3 per cent.
What you'll learn in this step: An understanding of the
different types of managed funds to help you select which ones are
right for you.
There are thousands of managed funds on the market today all
investing in various sectors and countries. The choice is
overwhelming. You can invest in asset-specific funds such as share
funds, property funds or fixed interest funds. Or you can opt for a
balanced fund which combines some or all of the different asset
classes. To further confuse you, even if you decide to invest in a
share fund, many offer greater specialisation within them.
Share funds
While share funds invest in shares, there are many variations.
You can, for example, choose a share fund that invests in
Australian shares or international shares or shares in emerging
markets. If you decide to invest in an Australian share fund, you
could opt for a fund that mirrors the All Ordinaries Index (a
passive or index fund) or one where the fund manager seeks growth
or value shares. A growth fund is one where the fund manager
selects shares that it believes is likely to outperform the market
regardless of how cheap or expensive they are. Value shares are
those a manager deems to offer good value in the market such as a
company with sound fundamentals that has been overlooked by the
market and trading relatively cheaply.
There are even further subdivisions. You might choose a fund
that invests only in industrial shares or one that focuses on
resource stocks. Or you might opt for one that specialises in
companies with fully franked dividends (imputation funds) because
of the tax breaks they deliver. Ethical funds that invest in
companies that have environmental or humanitarian policies are
another emerging area are becoming popular among investors.
Learn more: Booty is more than skin
deep, Sydney Morning Herald, 3 March 2001
With managed funds, what you see may not be what you get.
Property trusts
Yet again you are faced with a myriad of choice. Do you want a
listed or an unlisted property trust? The main advantage of
investing in a listed property trust is that they are more liquid
as you can sell your units through a stockbroker. With an unlisted
property trust, you have to apply to the manager of the trust to
redeem some or all of your units.
Other areas to consider with property trusts are the types of
properties they invest in: do you want a trust that focuses on
commercial or retail properties, or one that invests in hotel
developments? Within property trusts you can also choose between a
trust that offers income units and one that offers growth units, or
a combination of the two. The income from the income units is
generated from the rentals, while with growth units, holders'
returns come from the capital growth of the properties held within
the portfolio.
Property trusts can also offer tax advantages through property
depreciation and investment allowances.
Fixed interest funds
These are conservative investments where the money is invested
in very liquid products such as government and semi-government
bonds and debentures and unsecured notes. These funds tend to be
more secure than share funds as in some cases the investment is
guaranteed by the government. Such funds tend to suit investors who
are close to retirement and do not want too much volatility with
their investment.
Cash management
Cash management trusts were introduced in the early 1980s. Many
investors use them as bank accounts as most offer cheque book and
direct debit facilities. The interest rate are generally higher
than those on bank and building society accounts. Cash management
trusts usually require a minimum deposit but this can be as low as
$500. These trusts can only invest in government-backed or
bank-backed securities, making them very low-risk for
investors.
Diversified funds
Diversified funds invest in a combination of some or all of the
major asset classes with the aim to spreading the risk. There are a
number of different diversified funds which are often named
according to their level of allocation of capital growth - such as
shares and listed property or income generating assets - such as
cash and bonds. Some of the more common types of diversified funds
are listed below:
Conservative funds
Conservative funds invest in a stable mix of mainly
income-generating assets, with heavier weightings in cash and bonds
than shares and listed property. The aim is to provide income, some
growth and conservation of capital.
Balanced funds
Balanced funds invest in a balance of income and capital growth
assets. Usually all of the asset classes are represented. Balanced
funds tend to be more volatile than conservative funds and less
volatile than growth funds. If you are new to managed funds,
balanced funds are a good first fund to invest in as they tend to
aim for stable growth through their diversification.
Growth funds
Growth funds usually apportion a significant amount of their assets
to capital growth investments such as shares. Growth funds are
typically more volatile than conservative and balanced funds.
Bond funds
Bond managed funds invest in bonds which are the debt securities
issued by governments, semi-governments or corporations. These
funds can invest in either Australian or overseas bonds, or a
combination of them.
Master funds
Master funds are sometimes called funds of funds, multi-manager
funds or pooled master funds. Rather than invest directly in shares
and property, the master fund invests in other managed funds,
allowing you to take advantage of the different styles of the
different fund managers. There are two kinds of masterfunds,
discretionary and non-discretionary. The discretionary type lets
you choose the fund managers, while the non-discretionary funds
chooses the fund managers for you based on your risk profile.
Learn more: The next level, Sydney
Morning Herald, 8 Aug 2001
Low fees may sound attractive, but if you come to mezzanine funds
via a master fund, asks Christine Long, are they still worth
it?
What you'll learn in this step: What action you need to
take when choosing a managed fund
An abundance of choice can make it hard to choose a fund. This
is why it is often useful to seek advice from a financial planner -
although you need to make sure their advice is independent. An
alternative method is to check out the websites of a number of
online fund brokers such as Funds Direct where you can compare
funds including their fees and performances. You can also check the
ratings given to these funds by financial research groups such as
Morningstar, ASSIRT or InvestorWeb.
Points to consider
One of the first things to do when choosing a fund is determine
your risk profile. How much risk are you comfortable with?
- How much time are you prepared to tie your investment up for -
a couple of years or up to 10?
- Once you know your investment objectives, choose a fund that
invests in the appropriate sector that meets your aims.
- Check out the management team behind the fund and go with one
that is stable and reliable.
- Equip yourself with the most up-to-date performance figures and
information about the fund you are interested in. You can get this
direct from the fund manager.
- Choose a fund that has low fees and one that allows you to
switch your investments between sectors.
- Once you have narrowed down your fund choice, get the
prospectuses and read them carefully along with the IFSA statement,
which will detail the fund's objectives. You can usually download a
prospectus online
or phone the fund manager and have it mailed to you. All unlisted
managed funds have to issue a prospectus that is registered with
the Australian Securities and Investments Commission (ASIC).
Learn more: Find a fund
to suit, Sydney Morning Herald, 14 Feb 2001
The proliferation of managed funds on the market has provided the
means for novice investors and experienced market players alike to
individualise their portfolios.
Learn more: Picking winners, Sydney
Morning Herald
Spotting the right managed fund in a cast of thousands is a
daunting task. But first, choose your investment goals.
Past performance
Never judge a managed fund solely on past performance. Most fund
managers will only advertise their best results. They may show
returns over the past three years or the past six months or a
six-month period a year ago. And nobody can consistently be the
best performer. What you really need to look for is the rolling
average of, say, three years. That way you can more readily compare
funds. But remember there is no point comparing a value fund
manager with a growth fund manager. Given the nature of their
philosophies, the two types rarely excel at the same time. A good
fund managers sticks to its outlined principles and doesn't chop
and change to react to the latest economic situations. If they are
a growth manager and the market favours value managers, they
shouldn't be rushing to change their philosophy to follow the
latest wave. If you invest in a number of funds or a masterfund
that covers both types of management style, your returns should
even out over the long term.
Learn more: Wish upon a falling star,
Sydney Morning Herald, 8 Aug 2001
If a fund in which you have invested has a star knocked off its
rating it doesn't always mean you need to do backflips, writes
Christine Long.
Learn more: Find a managed fund with a
high-risk-adjusted return, Sydney Morning Herald, 14 Feb
2001
You're probably bored silly with people banging on about the danger
of simply picking funds with high returns. That's a dangerous game
as today's star often turns out to be tomorrow's dud.
Visit InvestSMART's
Find a Fund tool to research a comprehensive range of funds using
Assirt's extensive data feed.
What you'll learn in this step: How to buy into a managed
fund and to track its performance.
How to invest in a managed fund depends on whether a fund is
listed or unlisted. To invest in a listed managed fund you contact
a broker and submit a buy order. You will pay brokerage fees and
stamp duty on your purchase. Unlisted funds however, can be
purchased in a number of ways such as through a discount funds
broker, a financial planner or directly via the fund manager.
Find funds that meet your criteria using either of our search and compare
service.
Discount funds broker
There are a number of discount funds brokers who you can contact
either online or by telephone in order to buy or sell managed
funds. Discount brokers are so named because they generally rebate
the entire entry fee. Some include Direct Access, Neville Ward
Direct, TD Waterhouse, E*Trade, Your Prosperity and Commonwealth
Securities.
While discount brokers do not give advice, most provide you with
a variety of tools to help you with your choice. The tools are
becoming increasingly sophisticated and include ones to work out
your risk profile. Some will also suggest a selection of funds
based on your profile. Other information you can receive for free
include company reports and ratings given by the research
groups.
Financial planners
If you use a financial planner, they may take a commission from
the fund manager and an ongoing (trailing) fee for the duration of
your investment. While your entry fee will generally be rebated,
you will eventually end up paying for this through the fees
incurred by the fund manager on your investment. A financial
planner should advise you on the type of managed fund best suited
to you and your investment goals and this should be based on a
comprehensive interview with you.
Fund managers
You can also deal directly with the fund manager to buy and sell
managed funds. You can either phone for a prospectus or download it
from their web site. If you download it, then in most cases the
fund manager will rebate the entry fee. If you need advice, the
fund manager can suggest names of financial planners that can
assist you.
Learn more: Revolving species, Sydney
Morning Herald, 08 Aug 2001
The masters of the universe who sit at the tops of the biggest
managed funds are prone to displacement, writes John Collett.
Tracking your investments
You can get information about the performance of your managed
fund from the financial newspapers or magazines. If you are
interested in what your own portfolio is worth, you can get this
information by telephoning your fund manager, or accessing your
account online from your fund manager's web site. You shouldn't be
complacent about your managed fund. One that consistently
under-performs may need to be changed, although you have to look at
the reasons why it has under-performed. It could be that you are
with a value manager when the environment is benefiting growth
managers. But it equally could be because the fund management team
has significantly changed from when you first began your
investment.
Although you can switch between funds, be aware of what the
switching costs are. Usually you are allowed a set number of
switches between funds if you are switching within the same
financial services group. If you are changing fund managers, the
cost of exit fees and then subsequent entry fees can be an
expensive exercise.
Learn more: Turncoats out of pocket,
Sydney Morning Herald, 28 March 2001
Jumping from fund to fund in anticipation of market movements is
bad policy. You should seek advice.
Moneymanagers' portfolio tools allow you to create
share, funds and assest portfolios and track their performance.
Where next
Find
a fund - This tool allows you to find a managed or super fund
that meets your criteria.
www.fpa.asn.au
- A complete listing of certified financial planners.
www.fido.asic.gov.au/managed/index.htm
- Comprehensive information on managed funds investment.
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Step 1:
Step 2:
Each week financial advisor Noel Whittaker answers your
questions.
