Managed Funds - where to start

Managed funds are for people with at least $10,000 to invest, who are mortgage and debt free and who do not need their money back over the next few years.

Good reasons to invest in managed funds

  Expertise - Fund managers invest large amounts received from individual investors in listed companies and other investments and can afford to employ specialists to analyse, select, monitor and sell investments.

  Inside knowledge - Fund managers have easier and more extensive access to company directors and managers and can thus form a better picture of company strategy, developments and prospects.

  Diversification - Managed funds provide diversification even when you are investing small amounts.

  Exposure - There is a huge range of different investment asset types available, far too many, in fact. Managed funds are one way of gaining exposure to investments that are not otherwise easily available, such as offshore markets or commercial property.

  Size - The large pool of money means the manager can get better deals than one person with limited funds.

  Access - Generally you are able to access and withdraw your money simply and promptly, when you want it.

 Sleep easy - You don’t have to be bothered with ongoing buying and selling decisions (of individual stocks).

  Recommendation - Even the world’s number one investor, Warren Buffett, says the best thing an average investor can do is buy an index fund that mirrors the market.

And some reasons to be careful!

  Structure and Governance - Most managed funds are unit trusts with a trustee and a management company. Neither party gets very much public scrutiny and mangement is difficult to remove if they are not performing. There is no requirement for managers to account to unitholders in an annual meeting type forum and accountability generally is not the same as with a public listed company.

  Product Disclosure Statements - Product Disclosure Statements fail to provide a straightforward and reliable means of assessing the merits of a fund and comparing it with others. These long-winded and tortuous statements are written by lawyers to protect their clients from liability. Little consideration is given to the investor.

  Fees - There is no clear and consistent presentation of fees and other costs. It is very difficult to compare total fees across funds and almost impossible to compare returns after fees and taxes. Fees can be substantial, particularly for small investments and it is thus a real drawback that fees and net returns are not available and comparable.

  Taxation - The assessable income amounts for Australian taxpayers is not able to be determined until after the end of the financial year when the fund provides the distribution/taxation statement. Compare this to companies, where the proportion of franked/unfranked is provided PRIOR to the payment allowing an investor to prepare for the impact of the payment. Late arrival of the statements is also a real nuisance for those conscientious folk seeking to get their returns in on time.

  Access -  Yes it features above, but it can be and also has been a problem with many funds, particularly in falling markets. Access also has the disadvantage for open funds in that liquidity must be maintained to meet redemptions.

  Legacy – Huge amounts are tied up in Australian legacy funds, inaccessible to many investors because of legal and tax considerations. If fund structures change again in future, this will be an ongoing issue.

Having said that, we still believe managed funds should be regarded as part of a portfolio, particularly if you are a novice or inexperienced investor.

Understanding managed investments

We suggest you start by reading an IFSA guide to understanding managed investments. IFSA was previously called the Investment & Financial Services, the peak body for the managed funds industry in Australia. It is now called Financial Services Council and its members are the fund managers.