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Helpful Information on Managed Funds

What is a managed investment fund?

A managed investment involves pooling together money from different investors towards a common investment goal. The pooled money is then invested by a professional investment manager in different asset classes that align with the pool’s investment objectives and the investors’ risk profile.

Managed investments cover a variety of asset classes including:

  • Cash management trusts
  • Fixed interest
  • Property trusts
  • Australian shares
  • International shares
  • Agribusiness schemes
  • Film schemes
  • Timeshare schemes
  • Mortgage schemes

When you invest in a managed fund, you are allocated a number of ‘units’. The value of your units is calculated on a daily basis and changes as the market value of the assets in the funds rises and falls.

Managed funds have low minimum requirements on the investment amount, and you can also sign up for a regular investment plan. This carried the benefit of the investing power of millions traded by experts in this field.

The question is how do investors choose which managed fund to trust with growing their wealth? The CANSTAR managed investments ratings have been designed to assist small investors find a fund that best suits their needs and allows them to gain exposure to markets locally and around the world.

What to look for in a managed investment fund

Who are you?

Managed funds are appealing to many different investors, from young investors starting on their wealth accumulation journey, to everyday “Mum and Dad” investors looking to supplement their income, to seasoned investors looking to diversify their asset classes to mitigate risk.

CANSTAR rates managed investment funds according to the value they provide and how well they perform for three different profiles of investor:

  • Wealth Builder: Looking to invest at a low entry level or opening balance. Funds must offer a regular investment plan to make investing a simple process.
  • Regular Income: Looking to invest to supplement their income. Funds should provide regular returns to the investor, and must have a withdrawal plan so that investors can draw down income from the investment.
  • Seasoned Investor: Looking to invest part of their portfolio in a managed fund, with a higher minimum investment amount. A regular investment plan is not mandatory as seasoned investors are comfortable making investment decisions.

Investors should also consider their stance on ethical or responsible investment. Are you worried about what companies your fund invests in on your behalf? Choosing ethical investments is a growing trend, with more investors wanting to make sure their money is not funding activities that go against their personal values. Ethical investment funds can “screen in” companies that actively invest in sustainable activities like healthcare or green energy, and “screen out” companies that invest in world-damaging activities like coal seam gas, tobacco production, slave labour, or forest logging.

Price

One of the main factors in terms of value for money is how much it costs to make an investment purchase or sale. These can take a significant chunk out of any returns your managed investment makes, so you’ll need to know what fees you’re paying to get outstanding value for money.

The costs involved in a managed investment include:

  • Management expenses: This management fee is known as the management expense ratio (MER%) and it covers the costs of managing and operating the fund. For managed funds on the Canstar database, the MER ratio for managed investments ranges from 0.65% up to 2.28%.
  • Buy/sell spread: This is the transaction cost you pay every time you buy or sell units in the fund. It is charged as a percentage of the difference between the entry (buy) and exit (sell) prices of the managed investment. This fee exists to cover the fund’s costs such as brokerage and government taxes. The buy/sell spread can range from as little as 0.15% to as high as 0.60%.
  • Ongoing fees: Any ongoing fees for the managed investment charged in addition to the MER.
  • Termination fees: A fee charged for closing your account, over and above the Sell Spread. This is charged when you choose to sell your investment units and leave the managed investment pool.
  • Performance fee: Most managed funds don’t charge a performance fee on investment profits made through the fund, but some can charge up to 24%.

Features

The features that CANSTAR assesses in determining value ratings include things such as:

  • Product Conditions: Minimum investment required; minimum additional investments; minimum withdrawal amount; availability of regular investment plan; availability of different payment methods.
  • Invest Access: Online or phone access to check balance, statements, or update personal details; ability to make buy and sell requests online or by phone; ability to check fund performance online; availability of call centre for support.
  • Distributions: Frequency of fund distributions (weekly, monthly, quarterly); availability of reinvestment plan.
  • Fees and Rebates: Number of free switches per year; switching fee; termination fees; performance fees; availability of fee rebates or discounts.

Long-term performance

Past performance gives no prediction of future performance, but long-term performance is still worth considering. It’s best to look at how a fund has performed over the past 5-7 years rather than the past 1-3 years, so that you can see how reliable and consistent the fund is in providing a return.

CANSTAR ratings do not include a measure for investment returns, but we do review the fund’s performance over the past 5 years for signs of consistent underperformance.

Managed Funds Case Study

Andrew has been regularly saving into an account that has accumulated a little over $40,000. He doesn’t need the money in the short-term, so he is interested in trying to achieve higher returns through the stock market.

Andrew has retired and is looking for an easy-to-manage investment that will provide an income stream to supplement his superannuation. He should look for a managed investment that does not charge performance fees and has low fees generally, so that his income distributions are not eaten up by fees.

Having spent most of his working life as an environmental lawyer, Andrew wants to make sure his investment manager won’t invest his funds in a company that supports deforestation and logging activities. He should look for a managed investment fund with a strong focus on ethical investment.

Using the CANSTAR website, Andrew compares managed investment funds and checks the MER% fees and performance fees charged by a few ethical investment options. He chooses one that offers regular monthly distributions and considers his personal financial situation carefully before signing up.