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The investment universe (for beginners) – Managed Funds
Warning: the examples of managed funds in this post are for illustrative purposes only. They are not to be considered investment recommendations. I have no financial interest in any of the investments mentioned.
In the last article we dived into shares. Easy to buy but hard to pick the winners.
It can be fun and exciting to try and pick a winner, see your shares go up. Get stressed when they go down.
If you let it, buying shares can be a roller coaster of emotions.
This is not what investing is about.
If buying and selling shares is too overwhelming and you are looking for something simpler, the topic of this article is for you.
Managed Funds
A managed fund means instant diversification. But not necessarily adequate diversification.
A managed fund raises cash from potentially thousands of investors and invests on behalf of the investors. This is done to utilise the experience and expertise of a professional fund manager.
The Product Disclosure Statement is a document that outlines everything about the managed fund, the risks, the investments (generally not specifically), the fees and so on.
You don’t own the actual investments. You own units in the managed fund. The unit price is like the share price of a managed fund. It will go up and down based on the value of the investments.
If the investment managers do a good job, the unit price will increase. They do a bad job, it will decrease.
Similar to shares, you make money from managed funds via:
- Capital growth (of the unit price)
- Distributions
Distributions are the profits and income earned by the activities of the fund manager throughout the year. The distributions can be reinvested back into the managed fund, buying more units, or paid into your bank account.
The distributions are assessable income, whether reinvested or not.
The managed fund universe is a large one
There are thousands of managed funds on offer. There are hundreds of managed fund providers. Some are specialists in one particular asset class or industry, others invest in a range of asset classes. Some invest in other fund managers for a specific part of their managed fund. Therefore, one fund manager may invest in 10 or 20 other fund managers, or their own, to create a diversified portfolio to offer their investors.
This is why it is important to know where your money is invested and with whom.
For a fee, there are research houses such as Morningstar and Lonsec that offer in depth analysis of funds (and shares), or websites like Canstar or Investsmart that have free basic reports. Morningstar also has a basic free fund report feature as well.
Hint: Funds usually provide a fact sheet and monthly or quarterly updates so you can get a good idea of the underlying investments and the thoughts behind their decisions. They won’t give you full details in order to protect their intellectual property.
Diversified managed fund example:
Vanguard Growth Index Fund
| Funds | % |
| Vanguard Australian Shares Index Fund (Wholesale) | 27.90 |
| Vanguard Global Aggregate Bond Index Fund (Hedged) | 20.90 |
| Vanguard International Shares Index Fund (Wholesale) | 20.70 |
| Vanguard International Shares Index Fund (Hedged) – AUD Class (Wholesale) | 12.70 |
| Vanguard Australian Fixed Interest Index Fund (Wholesale) | 9.00 |
| Vanguard International Small Companies Index Fund (Wholesale) | 5.00 |
| Vanguard Emerging Markets Shares Index Fund (Wholesale) | 3.80 |
| Total | 100.00 |
Vanguard have created a portfolio of their own funds to create a product for a particular risk profile. As you can see, it covers Australian and International shares and fixed interest, small companies and emerging markets (economies of developing nations, as opposed to developed nations such as Australia, U.S.A, U.K. and others). However, they have chosen not to include property.
Single Sector managed fund example:
UBS Property Securities
| Asset Allocation | % |
| Australian Listed Property | 97.69 |
| Cash | 2.31 |
| Total | 100.00 |
Listed means, it’s a company on the ASX.
For this particular fund, the fund managers invest in direct shares within the property sector based on how UBS believe each company will perform. Therefore, within the managed fund there is diversification within the property sector.
An easy way to access international shares is through a managed fund.
International shares managed fund example:
Magellan High Conviction Fund – Class A
This fund provides access to companies such as Alphabet, Facebook, Microsoft, Netflix, etc.
In order to protect their intellectual property, they don’t go into too many details.
These are the sectors they are currently invested in.
| Sectors | % |
| Cash | 5 |
| Restaurants | 7 |
| Internet & eCommerce | 51 |
| Information Technology | 24 |
| Payments | 6 |
| Financials | 7 |
| Total | 100 |
These are the countries they are currently invested in.
| Country | % |
| US | 40 |
| China | 14 |
| Western Europe | 17 |
| Emerging markets ex-China (means excluding China) | 14 |
| Rest of the world | 10 |
| Cash | 5 |
| Total | 100 |
With a little effort, you can find out what sectors and countries they invest in.
From this, you can create the asset allocation.
| Asset Allocation | % |
| Global shares | 95 |
| Cash | 5 |
| Total | 100 |
With this information, you can now see how this managed fund can fit into your overall portfolio.
Fees
It’s only fair that professionals are paid for their efforts, if they are competent that is!
Fees to watch out for:
- Management fees (can range from 0.03% to 5% and above). The cost to run the fund.
- Transaction costs. The cost of buying and selling assets in the course of running a managed fund.
- Buy/sell spread (0.05% – 0.30% mostly). The cost of entering the fund. It covers transaction costs and the like.
- Performance fee. This type of fee is not common. If the fund manager exceeds a particular result, they will take a percentage of the over performance.
If the fund loses money, they will still charge the management fee.
Always read the Product Disclosure Statement to understand the fees charged.
The great debate of managed funds: Active vs Index
An actively managed investment fund is a fund in which a manager or a management team makes decisions about how to invest the fund’s money. The original aim of actively managed funds was to produce a superior return compared to doing it yourself.
In 1975, John Bogle created the first index fund. Bogle is the founder of Vanguard.
A share market index is an index that measures a share market, or a subset of the share market, that helps investors compare current price levels with past prices to calculate market performance.
In Australia, the two main indexes you may see in the news is the All Ordinaries Index and the S&P/ASX 200 Index.
- All Ordinaries Index is a summary measure of the share values of the largest 500 companies in the Australian share market.
- S&P/ASX 200 measures the biggest 200 companies.
Instead of a share price, you have an index value.
As the values of the individual companies within the index rise and fall, the value of the index will change. This is a way to see over time how the market is moving.
An index fund’s focus is to match the index. To achieve the market return.
Why on earth would you want average?
Because it is very hard to beat the market average consistently.
As discussed earlier, actively managed funds really wanted to beat the performance of you, the individual investor. Now the focus is on whether they can be the market index.
Why is this significant?
- Performance – Over the long-term, most professional investors do not beat the average market index (the S&P/ASX 200).
- Fees. Index funds fee are a fraction of the cost of an actively managed fund.
SPIVA Australia report on the performance of actively managed funds compared to their corresponding index.
In the report for the year ending 2020, over the last 15 years, 86.3% of Australian equity large company managed funds DID NOT beat the index.
This figure was even higher for International managed funds (93.4%).
In any one year, the ability to beat the market is better, however, over the long term, it ALMOST can’t be done.
Hence the rise of the index fund.
Quite often, today’s managed fund winner will be next year’s loser. Therefore, never chase performance. You will only lose.
Always look to a funds long term track record and compare it to the appropriate index.
You can find index funds that track the S&P/ASX 200 market or you can find a diversified managed fund that tracks a range of indexes.
Vanguard Growth Index Fund (from earlier in the article)
| Funds | % |
| Vanguard Australian Shares Index Fund (Wholesale) | 27.90 |
| Vanguard Global Aggregate Bond Index Fund (Hedged) | 20.90 |
| Vanguard International Shares Index Fund (Wholesale) | 20.70 |
| Vanguard International Shares Index Fund (Hedged) – AUD Class (Wholesale) | 12.70 |
| Vanguard Australian Fixed Interest Index Fund (Wholesale) | 9.00 |
| Vanguard International Small Companies Index Fund (Wholesale) | 5.00 |
| Vanguard Emerging Markets Shares Index Fund (Wholesale) | 3.80 |
| Total | 100.00 |
This fund (70% growth) offers a wide range of indexes that provides asset class, geographical and sector diversification.
With this fund, you are invested in potentially thousands of companies around the world.
Even Warren Buffet, the world’s most successful investor (currently worth USD$104 billion) recommends investing in a simple index fund.
Pros of index funds
- A central advantage to index funds is that they are relatively low-risk options for investing in shares and bonds, designed for steady, long-term growth.
- Highly diversified.
- Low fees.
Cons of index funds
- Lack flexibility. If the index is in constant decline, the index fund manager must by definition maintain the index, whereas an active fund manager can make trades to lessen the damage.
- No big gains. The top performing active fund will almost always beat the index in any given year, potentially by quite a margin, however, as stated earlier, over the long-term the index fund chugs along and beats most active fund managers.
Examples of the index fund providers:
- Vanguard
- Blackrock (iShares)
- Betashares
How to buy managed funds
Managed funds are offered to investor in two main forms.
- Unlisted – this means that you send money directly to the managed fund provider. You do not need a trading account to access these managed funds.
- Listed – you purchase units of these funds via the ASX like you would shares. These are also called Exchange Traded Funds (ETFs). You need to open a share trading account.
The difference?
There are small differences in how the fund is valued, but the main difference is in your transaction costs.
Let’s say you have $1,000 to invest.
An unlisted fund (direct with the provider) will charge a “buy” cost (also called entry and exit costs) of perhaps 0.10% to cover administration and transaction costs. 1,000 x 0.1% is $1.
A listed fund (an ETF) requires you to pay a brokerage fee with the trading platform to make the trade. For example, $14.99.
Therefore, how and when you invest becomes important considerations.
If you are investing monthly or weekly, going direct to the managed fund would be cheaper.
If you have a listed managed fund, to control total transaction costs, you may only invest once or twice a year.
Resources to find managed funds
Morningstar.
Canstar.
Investsmart.
For a full list of ETFs on the ASX https://www2.asx.com.au/markets/trade-our-cash-market/asx-investment-products-directory/etps
The Wrap
If you want to “play” in the market and buy some shares, have a basket of money set aside for that. Money that you can afford to lose.
But if you want to properly invest, I suggest starting with:
- A diversified index fund that matches your risk profile, or
- A couple of index funds of a local and international nature (either an unlisted manage fund or listed ETF).
As I don’t know your financial circumstances and goals, these are just suggestions.
The most important thing you can do is to start as long as it is in alignment with your goals. Learn as you go. Learn from mistakes. The simpler the better. Successful investing does not need to be complicated. It just needs to be consistent and disciplined.
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