Cheat Sheet

Managed Funds For Dummies (Australian Edition)

Managed funds in Australia are known as mutual funds in the United States and unit trusts in the United Kingdom. But what’s in a name? Managed funds are one of the most rewarding forms of investment for everyday investors. Fund managers often employ positive strategies, such as diversification across asset classes, and the funds derive both income, through distributions, and growth, through increasing asset value, making them a great way to reap your investment rewards — and the fund manager does much of the work for you!

A Checklist for Managed Fund Investing

Use this checklist for investing in managed funds as a quick reference point for each step of the managed fund investment journey. These pointers are a guide to what to watch out for and where you may need to do a little more work before making your investment decisions.

  • Set out your goals: Work out what you’re trying to achieve with your investments. Are you saving for retirement or for a deposit on a house, for example? Different goals are achieved through different managed funds.

  • Decide whether to go it alone or take advice: Work out if you want to make your own investment decisions or seek advice from a professional.

  • Figure out your timeframe: The time period you’re investing for will affect likely returns and the risks needed to achieve them.

  • Think about whether to invest via superannuation or outside super: For tax reasons, investing in your superannuation makes a lot of sense. But, in most cases, you won’t be able to get your money out until you retire.

  • Know what type of investor you are: Whether you’re conservative, aggressive or perhaps a mix of the two, the type of investor you are affects how you invest and in what types of funds.

  • Do your research: Know what types of funds are available and which ones are likely to suit your needs. Be very wary of investing in anything you don’t understand.

  • Consider using a master trust or wrap account: If you decide to use a financial planner, chances are you’ll be offered the use of one of these structures to help administer your investments. Although extremely useful, wraps and master trusts do cost money and may not suit all investors.

  • Understand the risks: Make sure the investment strategies of the fund you choose match your investing goals, and make sure you understand the risks involved in investing in any fund.

  • Read the product disclosure statement (PDS): Make sure you understand what the fund is offering by reading the PDS. This document tells you what the fund does, how much it costs to invest and a little about the fund manager. The legal information contained in the PDS may not be at the top of everyone’s must-read list but it does set out who does what in the fund.

  • Consider setting up a regular savings plan: Work out whether you want to invest money all in one go or build your investment over time with a regular savings plan. The amount of investment money you have to start with will obviously be a deciding factor!

  • Watch out for tax: Like most investments, managed funds are not immune from tax and you need to understand the quirks. Invest in a fund at the wrong time — for example, just before the fund distributes its income — and you could find yourself with a tax bill shortly after.

  • Check out the costs: Most funds charge you a fee for any initial investment in the fund plus ongoing management fees. You could also be charged a performance fee if the fund does well. The PDS sets out the fees.

  • Fill out the forms: When you’ve decided on a fund to buy into, complete the application form at the back of the fund’s PDS. If you’re a first-time investor with that fund manager, you need to include certified copies of your identification (passport, driver’s licence and the like).

  • Time your investment: Don’t be too concerned about trying to time the market — in other words, trying get the best price — but think about strategies such as dollar-cost averaging to help you get into choppy markets at a reasonable price.

  • Follow up your money: After you’ve sent in your application you should have something back from the fund manager within 14 days. If not, follow up.

  • Monitor your fund: Although the fund manager does most of the investment work for you, keeping track of what your fund is doing is always a good idea. If performance isn’t matching your expectations, you may need to rethink your strategy.

  • If you want to sell your fund, do it in writing: A fairly straightforward process, but you or your financial adviser need to let the fund manager know in writing. You should receive your money within ten days of the sale.

A Few Fast Facts about Managed Funds in Australia

For the trivia buffs among you, here are some intriguing facts about managed funds in Australia — the biggest, smallest, oldest, cheapest, most expensive, and the best and worst performing.

  • Size of the industry: The fund management industry in Australia looks after more than A$1.335 trillion in local assets (as at 31 December 2009). When you include money brought in from overseas and managed in Australia the amount goes up to $1.7 trillion. The industry is made up of more than 11,000 managed funds, with 131 registered fund managers operating. The top 30 fund managers control 86 per cent of funds under management. Compared with the rest of the world, Australia is ranked fourth by amount of money managed, after the USA (A$11.2 trillion), Luxembourg (A$2.3 trillion) and France (A$1.8 trillion).

  • Amount of funds under management: In 1992, the Australian government introduced a mandatory retirement income system through employer-sponsored superannuation. Since then, according to government figures, the funds under management (FUM) in the investment industry have grown by a compound annual rate of 11.9 per cent. In fact, FUM has doubled since 2003. In May 2010, the government announced an increase in the compulsory superannuation rate from 9 per cent to 12 per cent of each employee’s salary by 2020, no doubt adding further growth to the industry.

  • The first: The first investment in Australia calling itself a unit trust was, fittingly, the First Australian Unit Trust, set up in 1936 by Hugh Walton. However, the first investment company (not unit trust) was founded by JB Were & Son in 1928. Walton’s fund followed closely behind similar unit trusts that had begun to emerge out of post-Great Depression Britain in the early 1930s. The trust forecast an annual return of 10 per cent and charged a 7.5 per cent entry fee, which makes today’s typical 4 per cent look quite reasonable. The fund had a fixed 15-year term and, upon winding up in 1951, had generated 7.7 per cent per annum returns.

  • The oldest: The oldest fund still available to the Australian public is the Schroders Australian Equities Fund, set up in 1964 with more than A$1.1 billion in assets as at 31 May 2010. Schroders reckons that, since it began, the fund has returned 13.6 per cent per annum before fees. The second-oldest fund is the Perpetual Monthly Income Fund, which was established in August 1966, followed by the EQT Mortgage Income Fund, launched in 1971.

  • The largest: Platinum Asset Management and various cash management trusts dominate the top of the list for size. Up until mid-2010, Macquarie Group’s cash management trust (CMT) was the largest managed investment scheme in Australia and, at its peak just before the global financial crisis, had close to A$19 billion in assets. In 2010, Macquarie converted the CMT to an ordinary bank account. Platinum’s International Fund is the largest, with A$9.1 billion in holdings at 31 May 2010, followed by ANZ’s cash fund V2, with A$6.2 billion, the National Australia Bank’s Cash Manager, with A$3.6 billion, and the Platinum Asia Fund, with A$3.5 billion.

  • The smallest: A few funds operate with only A$10,000 in holdings. According to Morningstar, 87 per cent of managed funds have less than A$100 million in funds under management and, amazingly, 52 per cent of managed funds have less than A$5 million.

  • The cheapest: Funds that track a market index such as the S&P/ASX 300 Accumulation Index have some of the cheapest management fees around. The Macquarie True Index Share Fund charges no fees, according to Macquarie. Exchange-traded funds (ETFs) — similar to index funds but listed on the stock exchange — typically have fees ranging from around 0.2 per cent per annum up to 0.9 per cent per annum, depending on the market index being tracked.

  • The most expensive: Some managed funds charge both annual management fees and performance fees if they do well. Combining the two sets of fees, the most expensive retail fund in Australia is the Aspen Diversified Property Fund, with an annual cost of 4.54 per cent per annum and returns of an astonishing loss of 88 per cent over the 12 months to 31 May 2010. Funds that borrow money to invest, called geared funds, also make the expensive list, with many having annual costs running over 4 per cent.

  • The best performers: The three top-performing funds available to the general public in Australia over the seven years to May 2010 are specialist funds. The ING One Answer ING Small Companies Growth Fund returned 25.84 per cent per annum, the ING One Answer ING Resource Opportunities Fund returned 21.28 per cent per annum and the BT Classic Investment Natural Resources Fund returned 19.87 per cent.

  • The wooden spooners: The funds that have performed the worst in Australia over the five years to 31 May 2010 are all property funds. The worst performer was the Australian Unity Property Securities Growth Fund with minus 25.66 per cent return per annum. The Real Estate Capital Partners Enhanced Income Fund lost 12.41 per cent per annum and the EQT SGH Property Income Fund lost 5.78 per cent per annum

What Type of Investor Are You?

Fund managers and financial advisers often provide risk-profile questionnaires to help you determine what type of investor you are, based on your tolerance to risk, investing timeframe and investment knowledge.

Knowing your investor profile is crucial to working out what type of investment suits you, although this awareness alone is no substitute for a financial plan from a qualified professional, as it cannot take into account all of your personal circumstances and financial needs. Here is a basic risk-profile questionnaire, similar to those the professionals use.

How to use the risk profiler

Using the risk profiler involves three steps:

  1. Complete the questionnaire.

    For each of the questions, choose the response you identify with most, with only one answer per question.

  2. Calculate your score.

    Beside each answer is the score it carries. Add the scores for your answers together to get your total score.

  3. Review the selection.

    Match your total score with its investor type, shown in the table at the end, to see if it reflects your attitude to risk. You may need to take into account other personal financial circumstances that may see you selecting a different type.

The risk-profile questionnaire

Take the time to think carefully through each of the questions, even if you’re only completing the questionnaire out of interest. Down the track you may decide the results could be a useful starting point for your investing journey.

  1. What do you want to achieve when you invest?
    1. An investment that does not fluctuate in value. (1)
    2. Keep the value of my investments with regular income on which to live. (2)
    3. Maintain regular income with some exposure to capital growth. (3)
    4. I’m not worried about income, just maximising the growth of my investments. (4)
  2. How long are you prepared to hold investments for?
    1. Two years or less. (1)
    2. Three to five years. (2)
    3. Six to ten years. (3)
    4. More than ten years. (4) 
  3. How would you react if your investments were to fall in value by 15 per cent over a one-year period?
    1. Help! Take all my money out and put it in a bank deposit account. (1)
    2. Take out some of my money and move it to a ‘safer’ investment strategy. (2)
    3. Wait until I recover the loss and then consider other investments. (3)
    4. Stick to my guns and follow the recommended strategy. (4)
    5. Wow! It’s 15 per cent cheaper to invest more money in the same investment. (5)
  4. What is your willingness to risk short-term losses for the prospect of higher long-term returns?
    1. Low. (1)
    2. Not sure. (2)
    3. Moderate. (3)
    4. High. (4)
  5. Choose the most appropriate response to the following statement: I am willing to experience the ups and downs of the market for the potential of greater returns.
    1. Strongly disagree. (1)
    2. Disagree. (2)
    3. Neither agree nor disagree. (3)
    4. Agree. (4)
    5. Strongly agree. (5)
  6. Choose the most appropriate response to the following statement: My main concern is security; keeping money safe is more important than earning high returns.
    1. Strongly disagree. (5)
    2. Disagree. (4)
    3. Neither agree nor disagree. (3)
    4. Agree. (2)
    5. Strongly agree. (1)
  7. When it comes to investing, how experienced do you think you are?
    1. Inexperienced — investing is a new experience for me. (1)
    2. Somewhat inexperienced — investing is fairly new to me. (2)
    3. Somewhat experienced — knowledgeable. (3)
    4. Experienced — I know the factors that make investments go up and down. (4)
    5. Very experienced — I do my own extensive research and have an excellent understanding of what factors affect investment performance. (5)
  8. How secure is your future income (such as from salary, pension or other investments)?
    1. Not secure. (1)
    2. Somewhat secure. (2)
    3. Fairly secure. (3)
    4. Very secure. (4) 
  9. How would you describe your current financial situation?
    1. Completely debt-free. (5)
    2. Mortgage-free but a few other obligations (such as credit card debt, education fees). (4)
    3. A reasonable mortgage but no other debt. (3)
    4. A mortgage and some obligations. (2)
    5. Up to my eyeballs in debt (such as a mortgage, credit card and/or margin loan). (1)

The scores

Now add up the scores for all of your answers and match the total score with the categories in the table to see what type of investor the questionnaire indicates you are. You may want to do some further research to find out the investing characteristics of these investor types and adjust the result, depending on your personal circumstances.

Risk Profile Scores and Investor Types
Total Score Investor Type
9–14 Defensive
15–21 Conservative
22–28 Balanced
29–35 Growth
36–41 Aggressive growth
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