- managed investments
- active vs passive
- net asset value
- fund structures
- hedge funds
- practical steps
- Managed investments can be an option for investors who do not wish actively monitor, research and action on their own investments.
- Investors will give over their money to the fund manager who will essentially invest for them, often giving the option of investing in different asset classes and strategies with differing levels of risk.
- One characteristic of a managed investment is that they allow for the pooling of funds, giving them greater access to a wider range of different investments than an individual or small business.
- In return for their services, fund managers will take a fee, the size of which being dependent on the services that they offer to clients.
- Managed investments offer quite a few benefits:
- Access to investments that may previously be unavailable to individuals due to size or other restraints.
- Transaction costs are significantly cut down for managed funds
- A fund manager will likely have a lot more resources devoted to research than an individual investor
- Australia has a well-developed funds management industry, meaning prospective investors have a large range of choices, while managers also have an incentive to reduce their fees due to competitive forces.
- Investing in managed investments also carries a few unique risks:
- There is always the risk that a fund manager may fail to perform, although there are sometimes forces outside of the manager’s control which can create a difficult environment to perform in.
- An investor may be ignorant to what exactly a fund will invest in – this may be due to insufficient research from the client, or a lack of clarity from the fund manager. Placing money towards unknown groups of investments increases the risk of a client not being aware of market events potentially affecting their investments.
- Fund managers can carry multiple fees, on top of the usual annual cost. Performance fees, contribution fees, and termination fees are a part of the managed funds industry and it is up to the client to understand which of these are included when investing with a fund.
- Not all funds have high liquidity; some may have restrictions on how often you can withdraw which can cause a problem for an investor if they need access to their money with short notice.
active vs passive
- Fund managers can be split into two categories; active and passive.
- An active manager will try and obtain higher returns than a given benchmark while a passive manager will attempt to match that benchmark.
- The benchmark is often an index which charts the performance of a very large portfolio (or “market portfolio”).
- A passive fund will usually have lower fees as there is less involvement on their end in terms of managing their client’s money.
net asset value
- A net asset value (NAV) is the calculation of a fund’s total market value, minus performance fees.
- In buying into a managed fund, you are often doing so through units or shares; the price of which is dependent on this NAV figure.
- Before delving into different fund structures, there are two differentiations to be made regarding funds:
- Open-end vs Closed-end: An open-ended fund has no limit to the amount of investment they can receive, while a closed-ended fund will have restrictions on how much money can be put into the fund.
- Listed vs Unlisted: Listed funds are found on financial exchanges while unlisted funds require an investment to be placed directly with the manager or through one of its distributors.
The three most common types of trusts are below:
- Unit trust: The fund is broken up into units (similar to the way that a company is comprised of shares) and the price of these are based on the NAV of the fund. Unit trusts can be either open or closed-end, they’re unlisted and they can be active or passive.
- ETFs: These are listed funds that are typically passive and open-ended. The price of the ETF is based off of the NAV, however they can trade at a premium if the demand for the ETF is quite high, and at a discount if the demand is relatively low.
- LIC (Listed Investment Company): These are listed funds that are closed-ended, and are actively managed.
Conduct research on 5 different managed investment products, preferably with different structures (i.e. unit trust, ETF, LIC). You can use Money Management’s Investment Centre to conduct this research. Try to get a feel for how products can be compared in relation to asset allocation, fees, sector focus, performance history, and fund strategy.
Decide as to whether you prefer retaining control of your investment decisions, or whether you prefer managed investments (refer to topics: Benefits and Risks). Note that financial planners can provide advice around managed investment products.
Make sure that you understand your risk profile. You can find this out using BT’s online tool. This will provide you with some indication (it is not a perfect science!) of how much risk you should be adopting around your investment portfolio.
If you decide on managed investment products – there are two main ways in which you can use them to construct a portfolio:
Pre-mixed – you can pick a single managed investment product that is diversified across asset classes (e.g. a “balanced” or “conservative” fund”). This saves you time and effort having to find several products that focus on one asset class.
Single asset class – you can pick several managed investment products that focus on one asset class. A reason you might do this is that some funds might be high-performers, and you may prefer mixing only the “best-of-breed” funds in your portfolio.
When selecting managed investment products, make sure you read the product disclosure statements thoroughly. Understand the fees, fund strategy, objective, and intended (target) asset allocation.
Monitor your portfolio on a regular basis (every 3-6 months). Check to see how different markets have been trending.
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