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Helpful Information on Managed Funds

What are managed funds?

A managed investment fund is where your money is pooled together with other people’s money in order to invest in a common investment goal. Managed funds are also known as managed investments, and managed trusts, because they are a type of trust where the fund manager holds and controls the money on your behalf.

Managed funds are either listed (traded on the share market) or unlisted (bought and sold directly through the fund manager). Listed funds are valued according to supply and demand, whereas unlisted funds are valued weekly by the fund manager.

Different asset classes:

The fund manager invests the pooled money in different asset classes in order to reach that goal. Asset classes include:

  • Shares (a.k.a. equities)
  • Cash securities
  • Property
  • Fixed interest investments (a.ka. fixed income investments) such as bonds

Managed funds might be a low-stress choice for investors who want an expert to conduct in-depth research of the market and investment options for them. Managed funds also let investors diversify by investing in a wide range of asset classes at once. Investors buy shares in the managed fund and the managed fund buys shares in different stocks.

Investors do not have a direct say in where their money is invested by the fund manager. However, they can choose which level of investment risk the managed fund undertakes for them, and there are thousands of managed fund products available to choose from.

Some managed funds are multi-sector funds, and they invest in a range of investments and asset classes. Some examples of multi-sector funds include:

  1. Conservative – low risk
  2. Capital-stable – defensive, low/medium risk
  3. Balanced – medium risk
  4. Growth – high risk
  5. Aggressive/High Growth – very high risk

Different categories within asset classes:

Some funds only focus on a specific category within an asset class. When it comes to shares, at CANSTAR we assess funds for Australian shares and global shares separately. Then within Australian shares, the categories include:

  • Australian small-cap shares
  • Australian large-cap shares
  • Australian share index fund
  • Australian income shares

To help you compare and choose between the thousands of managed investment schemes on the market, CANSTAR releases annual Star Ratings Reports on different categories of managed funds:

Saving and building a portfolio:

Many managed funds also let investors set up a regular savings investment within the fund, so that you can add a little extra to your investment every month. This can be an easy way to build your investment portfolio gradually over time.

A managed investment scheme can invest in many different asset classes. Some examples of common managed fund investment classes are outlined below, but keep in mind that there are many different combinations of each of these.

  1. Cash management trusts:

Investment in cash securities as the main asset. Cash securities include bank deposits, bills of exchange and promissory notes. These trusts may be marketed as a low risk investment product, with small capital gains to be expected.

  1. Property trusts:

Investment in different types of property, including residential and industrial properties, hotels and even shopping centres.

  1. Australian equity (share) trusts:

Investment in Australian shares. As the share market goes up and down regularly, there is more risk in this type of investment, but it also has the potential for high returns.  Equity trusts can also invest in derivatives (such as options) to hedge your bets and protect your investment from risk.

  1. Agricultural or agribusiness schemes:

Investment in farming, livestock or forestry. As your investment could be wiped out by unpredictable weather or natural disasters, agricultural and agribusiness investment schemes carry considerable risk.

  1. International equity trusts:

Investment in international or global shares. Equity trusts invest in shares all over the world, and as the share market globally can be quite volatile, these types of investments are generally marketed as a long-term investment option with short-term volatility.

  1. Film schemes:

Investment in – you guessed it – a movie. Film schemes bank on a movie turning a profit.

  1. Timeshare schemes:

A timeshare is where people pay to share the ownership of a property. Each person owns the right to use the property for a set period of time every year (usually only a few weeks). People usually buy timeshares so they can go on holidays regularly rather than to get a return on their investment. This is good, because a timeshare is a long-term managed investment that can be quite difficult to sell.

  1. Mortgage schemes:

Pooled money is used to lend money to borrowers who are buying properties. The risk involved depends on the quality of the borrowers and their likelihood to repay. The returns on this investment come as quarterly or half-yearly distributions of the interest on the loans.

Most common fees on managed funds:

Contribution Fee

A contribution fee is charged when you pay money into your investment. The fee is usually a percentage of the amount you contribute, and can vary between 0% to 5%. This type of fee is often negotiable, so you should always ask if it can be waived.

Administration Fee

Also known as a Management Fee. A fee charged by the fund for controlling and administering your investment.

Management Expense Ratio (MER) Fee or Investment Fee

The MER is a fee paid to the investment fund manager for managing your investment. The amount of the fee varies substantially depending on which assets the fund invests in and whether or not the investments are actively managed. The fee is usually charged as a percentage of your account balance.

Managed funds charge an ongoing fee for managing your investment, called the management fee or management expense ratio (MER). This is calculated daily based on the gross assets of the fund. For managed funds rated in CANSTAR’s 2016 star ratings, the MER ratio ranges from 0.45% up to 2.50% depending on the type of fund.

Fee type Profile Min Average Max
Management Fee Multi-Sector Aggressive 0.76% 1.18% 2.20%
Management Fee Multi-Sector Growth 0.69% 1.16% 2.00%
Management Fee Multi-Sector Balanced 0.45% 0.99% 2.50%
Management Fee Multi-Sector Moderate 0.45% 0.88% 1.80%
Note: The fee is based on $50,000 initial investment. Based on products assessed for 2016 star ratings. Not all managed funds in the market are compared

Performance Fee

If a managed fund outperforms their stated benchmark for the period, they may be entitled to charge a performance fee. This is charged as a percentage of the extra profit. An example of a stated benchmark might be: “To outperform the S&P/ASX 200 by 2% on a rolling 3-year average.”

Buy Sell Spreads

These are fees charged to recover the costs involved with transaction such as buying and selling assets. Such costs can include brokerage, clearing costs, settlement costs and stamp duty.

Ethical or Responsible Investment is investing in assets or stocks that match your moral or political views. Responsible investments can be selected by reading Australian Ethical Investment’s Ethical Charter or by choosing a responsible managed fund. Approximately 70% of the ASX100 are regularly ruled ineligible for the Charter, but that still leaves a multitude of profitable investment options.

Responsible managed funds typically take one of the following approaches:

  • Screening investments – removing companies with negative characteristics or that contravene UN norms, or selecting companies with positive characteristics.
  • Sustainability themed investing – selecting companies that provide clean energy, green technology, sustainable forestry or agriculture, and water technology.
  • Impact and community investing – selecting companies that are working to solve social or environmental problems in a particular area.

A growing trend:

Ethical investment now makes up 50% of the managed funds industry. The 2015 Responsible Investment Association Australasia (RIAA)  figures show massive growth even over the past few years, from $153 billion in 2014 to $682 billion in 2016.

Just ten years ago, this was a mere fringe activity undertaken by a few, with only $13.9 billion invested in ethical investments in 2002.

Changing the world one dollar at a time:

According to Chief Investment Officer of Australian Ethical Investment, David Macri, ethically-aware investors can help to create industry change.

“It is not yet at a tipping point, but the increased awareness can provide the momentum required to pressure companies to behave more ethically,” he said.

Making good returns:

It used to be thought that ethical investment would not give a healthy return on funds, and if you wanted to invest “ethically” you were choosing not to make money. This myth has been well and truly busted over recent years by hard data showing that ethical funds actually give superior returns to the broader market. And the risk required to achieve those returns is the same as or lower than the market.

Examples of industry sectors chosen by responsible funds for investment are healthcare companies and renewable energy producers. These are both industries that are booming due to our ageing population and growing awareness of sustainable energy production.

Please note that these are a general explanation of the meaning of terms used in relation to managed investment funds. Your provider may use different terms, and you should read your product disclosure statement carefully to understand everything that may apply to your fund. You cannot rely on these terms in relation to any managed fund you may purchase.

Administration fee: Also known as Management Fees. An ongoing fee charged to cover the lender’s internal costs of creating and maintaining the account.

Asset allocation: Also known as the asset mix. The way a fund distributes (allocates) your invested money into different asset classes, e.g. ‘100% cash’, or ‘20% shares, 20% bonds, and 60% property’. Assets can be allocated between growth and interest-bearing investments.

Asset class: Also known as an asset sector. A group of securities that have the same characteristics. Asset classes include Australian shares, international shares, property, cash, fixed interest, and private capital investments.

Balanced fund: A fund or portfolio which invests in all major asset classes: cash, fixed interest, property, and shares. This mix can include domestic and/or international assets. A balanced fund provides long-term capital growth and a reasonable level of income, and is a medium risk investment option.

Basis points: A unit of measurement used in finance to describe a change in interest rates or the value of a financial product. One basis point is 0.01% or 0.0001.

Benchmark: Provides a standard for measuring how a fund manager’s investment has performed long-term compared to a market index such as the All Ordinaries Accumulation Index.

Bond: A type of fixed interest, debt security issued by corporations, governments or government agencies. Someone who owns bonds becomes a creditor of the bond issuer, not a shareholder in the agency.

BPAY: An electronic system for paying bills in Australia. Payment is made through a financial institution’s online or telephone banking facility to merchants listed on the BPAY register of billers.

Capital: The value of an investment in a house or business, represented by total assets less total liabilities.

Capital growth fund: A fund that primarily invests in assets likely to increase in value, such as shares and property.

Capital guaranteed fund: A fund that guarantees a specified return (declared investment return) on top of the original capital.

Contribution: An amount of money that you add to (contribute to) your investment fund. A similar concept to a deposit placed in a bank account. Some managed funds charge a fee for the administration of each contribution you make.

Cost basis: The value of an investment, consisting of the amount of the original investment, any additional incremental investments, capitalised fees, and retained earnings from the investment. This valuation does not take into account any unrealised gains from market valuations.

Diversified option: An option that invests in multiple asset classes (usually more than three).

Dividend: The distribution of part of the earnings of a company to its shareholders.

Emerging market: The share market of a less developed economy (as benchmarked by the World Bank). Emerging markets are defined by having a GNP (gross national product) substantially below the average for developed economies, a highly-regulated market with restrictions on foreign investments, and a higher investment risk than developed markets. Investors can find emerging markets appealing because they have the potential for high growth rates resulting from economic reform.

Equities: Shares. (See ‘Shares’ below.)

Financial advisor: A professional individual who is licensed to provide investment advice to others for a fee. Also known as a financial planner.

Growth fund: A managed fund that predominantly invests in growth assets.

Hedge fund: A managed fund where the fund manager is authorised to use derivatives and borrowing with the aim of providing a higher return.

Inflation: An increase in the amount of money and credit in circulation, compared to the amount of available goods and services, which results in a continuing rise in the overall price levels of goods and services.

Long-term investment: An investment that matures in more than five years.

Managed fund: An investment fund where many individuals pool their money and a fund manager controls how the money is invested, fees are charged, and returns are distributed.

Medium-term investment: An investment that matures between 2 and 5 years.

Outperformance or Underperformance: How well a fund has performed, as measured against an index, competitor, or other benchmarks.

Portfolio: The total list of investments owned by an investor. Usually refers to securities.

Securities: Written undertakings to repay money, such as bonds, bills of exchange, promissory notes or share certificates. These are usually negotiable instruments that establish ownership and payment rights.

Shares: Also known as equities. A person who buys a share in a company is buying a portion of the company’s capital. They become a shareholder in that company’s assets and receive a share of the company’s profits in the form of dividends. Different types of shares include ordinary, preference, cumulative preference, and participating preference shares.

Short-term investment: An investment that matures in less than 2 years.

Socially Responsible Investment (SRI): A type of managed fund or investment that chooses to invest solely in companies that are acting in ways that are socially and environmentally sustainable. SRI funds are becoming popular quickly, and they typically outperform index markets. An SRI fund also has non-financial aims, including attempting to improve working conditions in developing countries, and restoring the environment.

Volatility: A measurement of how much returns vary over time. The volatility of a market directly affects its level of investment risk.

Wholesale fund: A managed fund where individuals pool their money to invest collectively, and distributions are made to investors pre-tax. Investors benefit from getting better diversification than they could achieve as an individual investor, and paying their own rate of tax on the income, which is usually a lower rate than the fund’s company tax rate.

Yield: The percentage rate of return earned on an investment.

Who offers managed funds in Australia for Australian and global equities?

As of our 2016 star ratings, we research and rate the following managed funds:

  1. Aberdeen
  2. Adelaide Cash Management
  3. Advance
  4. AET
  5. Allan Gray
  6. All Star
  7. Alpha
  8. Alphinity
  9. AMP Generations
  10. Antares
  11. Arnhem
  12. Ausbil
  13. Australian Ethical
  14. Australian Unity Investments (AUI) Platypus
  15. AXA – Generations
  16. Bennelong
  17. BT Group
  18. Clime
  19. Colonial First State FirstChoice Investments
  20. DDH
  21. EQT
  22. Fidelity
  23. Fiducian
  24. FirstChoice
  25. Goldman Sachs
  26. Grant Samuel
  27. Greencape
  28. Hyperion
  29. Ibbotson
  30. IFP
  31. Integrity
  32. Invesco
  33. IOOF Holdings Ltd
  34. Ironbark
  35. Lazard
  36. Lincoln Retail
  37. Macquarie
  38. Maple-Brown
  39. MLC MasterKey Investment Service
  40. netwealth
  41. Nikko
  42. Northward Capital
  43. NovaPort
  44. OC Funds Management
  45. OnePath
  46. Ord Minnett
  47. Pengana
  48. Perennial
  49. Perpetual
  50. Peters MacGregor
  51. PIMCO
  52. Platinum
  53. PM Capital
  54. Prime Value
  55. Russell
  56. Sandhurst
  57. SGH20
  58. SIM
  59. Smallco Broadcap
  60. Suncorp
  61. Tyndall
  62. UBS
  63. van Eyk Blueprint
  64. Vanguard
  65. Ventura
  66. Walter Scott
  67. Wavestone
  68. WealthFocus Investment Advantage Perpetual
  69. Westpac
  70. Wholesale
  71. Wilson Group Ltd
  72. Zurich Investments

For more information on how CANSTAR rates managed funds, read our ratings Methodology.