Managed funds can be a useful tool for investors, particularly investors who do not have the time or the skills to undertake a lot of research themselves in choosing individual assets in which to invest.
Investing in a managed fund can allow investors to gain exposure to a variety of asset classes without running the risk of being over exposed to any single asset. Different managed funds focus on asset classes as diverse as domestic equities, international equities, cash, real estate, fixed income and funds of funds.
Each managed fund should be run in a profession manner and should also adhere to a predetermined investment mandate that will outline the parameters within which the fund can invest. The scope of this mandate could be a critical element in helping an investor decide of the fund is ‘right’ for them. Some funds will be decidedly ‘high risk’ and others will be ‘low risk’ and investors should make sure that they only invest in a fund that has a similar tolerance to risk as they themselves have.
One of the main benefits of investing in a managed fund is that the fund will have exposure to multiple separate underlying assets, giving the investor exposure to their collective performance without giving too much exposure to any single asset. If one of the underlying assets performs very poorly, it should only have a muted impact on the value of the investment.
Investors buy units of equal value in a fund and if the value of the assets owned by the fund go up, the value of their units will also go up and vice versa. Profits from the sale of assets in the fund and income generated by the assets are passed onto unit holders in the form of distributions.
Another advantage of managed funds is that they can allow investors to gain exposure to assets that may have minimum investment sizes that are out of the reach of the typical investor. An example of this could be a fund that invests in Australian hybrid securities. Some hybrids are sold in minimum tranches of $1m. Many investors would find that the minimum investment size put access to the hybrid out of their reach, but they could gain exposure to the hybrid through a fund.
Smaller investors might also find that they cannot secure an allocation in a newly issued instrument because it has been oversubscribed by larger institutional investors. Investing in fund that has secured an allocation to the instrument would give the investor exposure to that instrument.
Of particular interest to reader of YieldReport could be fixed-income securities. These fall into an asset class that is notoriously difficult to invest in directly but Australian fixed interest funds can allow investors access to a range of Australian and global bonds that they simply could not access by themselves.
This is not to suggest that managed funds are risk free. Investors in a fund must still undertake rigorous due diligence on their investments. What is the past performance of the fund? What is the reputation of the fund managers? What benchmark does the fund use? Investors should also gain an appreciation of the underlying assets that make up the fund’s portfolio, investment strategy and track record of the managers.
Finally, investors should also understand the costs associated with investing in a fund. These will range from entry and exit costs to ongoing management fees and should be compared to make sure that they are realistic and competitive.
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Paul McNamara is an editor and journalist with over 20 years’ experience. His career includes spells with the Financial Times, Euromoney, BRW Media, Asia-Inc and Banker Middle East. At present he is editor of YieldReport. YieldReport is a digital newsletter that carries comprehensive pricing and commentary on Australian interest rate securities in a monthly and weekly report. Each issue covers bank bills, cash accounts, term deposits, government bonds, semi-government and corporate bonds, hybrids, ETFs, managed funds and more. Click here for a free trial subscription. |
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