14 September 2021
What is a Managed Fund?
A managed fund is simply a professionally managed investment fund that pools money from many different investors to purchase securities (shares, bonds etc). As an investor, you own units in the fund. These units have an entry price per unit and an exit price.
How it works is that your money is held in a pool in the legal ownership of an independent corporate trustee who represents the interests of all unit holders. The trust in which your funds are held is a ‘bare’ trust. The corporate trustee holds legal ownership but is not able to perform any transactions without your written permission.
The beneficial ownership lies with the unit holders. What this means is that should the fund manager go out of business, the value of your investment will not be impacted by that event.
Your investment risk is confined to the risk that arises from the underlying securities held within the fund. For this reason, holding most of your investment funds with one manager does not mean you have all your eggs in one basket. It is, however, important that your portfolio is diversified in terms of asset class – that is, you are invested in either a diversified fund or a number of different funds in different asset classes.
The fund manager will charge a fee for selecting and managing the securities within the fund. Fees vary between managers. From an investor perspective, while it is important to know what the fees are, your focus should be on the performance of the fund manager after the deduction of fees. There is nothing wrong with paying a higher fee if the fund outperforms others. It is the net return to investors that counts.
When comparing fund managers, there are some important considerations.
1. How big is the fund? Bigger funds tend to be more cost effectively managed, and size is to some degree a measure of success, unless it is a new fund.
2. What is the track record of performance? Most funds aim to exceed a benchmark, which is usually an index of some kind. For example, a fund which invests in New Zealand shares may aim to exceed the performance of the NZX50 Index. Look at the performance of the fund compared to the stated benchmark and also compared to other fund managers who are investing in the same asset class. Make sure you are comparing apples with apples. There is little point comparing a fund which invests in New Zealand shares with a fund invested in global shares as these asset classes perform differently regardless of who the fund manager is.
3. What is the reputation of the fund manager? Look at the key staff and the governance of the fund manager and check to see there is no history of warnings or negative events regarding either the staff or the company as a whole.
4. What is the management style of the fund manager? There are various approaches to investing. One approach is what is termed passive investing. A passive fund mirrors an index. For example, a passive NZX50 fund will buy shares in the same proportion as the shares which make up the NZX50 index. This means the fund will closely match the performance of the NZX50 index. On the other hand, an active fund manager will attempt to outperform the NZX50 by picking stocks, some or all of which may be outside the shares included in the NZX50. They do this using research to identify shares that are either undervalued or on a high growth path. The advantage of passive funds is that the fund management fee is a lot lower, as there is no need for research. The disadvantage is that they will blindly follow the index, which means that when the index falls in value, so will the value of your fund. Broadly speaking, passive funds work best when the market is rising but not so well when the market is falling. It can be useful to have a mix of active and passive funds in your portfolio
5. What is the fund manager’s policy on responsible investment? Most investors these days are conscious of responsible or ethical investment. Every fund manager is required to disclose what their policy is. There are various approaches. Some fund managers simply avoid the obvious unethical investments such as tobacco, gambling, cluster munitions etc. Another approach is to seek out industries which have a positive impact on the world, such as alternative sustainable energy production, or waste elimination. Yet another approach seeks to use shareholder power to influence the governance of companies in a positive way. This is an approach used by large fund managers and superannuation schemes who due to their size carry considerable voting power.
6. What is the liquidity of the fund? It is important to know that you can have access to your money within a short time of requesting a withdrawal.
7. What are the investment risks outlined in the product disclosure? Always read the product disclosure statement before investing and pay particular attention to the section on investment risk.
Managed funds are Portfolio Investment Entities (PIEs) which means that your tax is paid within the fund at your Prescribed Investor Rate. This is a final tax, so your fund investment returns do not need to be included in your annual tax return. Managed funds make investment very simple, which means you can spend more time enjoying your retirement and less time worrying about paperwork and investment performance.