Investment Choices

Managed Funds

Investing in Managed Funds

What is a managed fund

A managed fund is an investment vehicle, where an investors money is pooled together with many other investors, and is then managed by an investment manager (also known as a fund manager).

Investors receive units in the fund, which may then be sold at a time in the future. The value of the units in the fund will rise and fall with the value of the underlying investments of the fund.

Investment options available

Managed funds are available across pretty much the entire spectrum of asset classes. You can find managed funds that provide exposure to:

  • Australian shares
  • Global shares
  • Commodities
  • Precious metals
  • Currencies
  • Property trusts
  • Bonds / Fixed interest
  • Cash

Some funds, known as hedge funds (or alternatives) can use a range of strategies to try and create investment returns with a lower level of volatility than assets such as shares. Some are more successful than others at this endeavour.

Managed funds can also target a specific sub-sector with an asset class.

For example, within Australian or global shares, a fund may invest in just certain sectors such as resources, or financials, or healthcare etc. Within fixed interest, some funds invest just in Government bonds or corporate bonds, or floating rate bank bonds etc.

At the next level, managed funds have also been created to enable investors to get access to specific investment strategies.

The list of options is very large, with a large variety of possible combinations.

Distributions

The income generated by the underlying investments, along with any realised capital gains from trading within the fund, are paid out as income to unit holders. These are known as ‘distributions’, and are paid at least annually, with some funds paying either half yearly or quarterly (some are even monthly).

The benefits

There are a number of benefits to investing in managed funds. These include:

  • Being able to access a range of asset classes with a small amount of money
  • Being able to diversify across a wide range of assets with a small amount of money
  • Being able to access asset classes that are generally difficult for individuals to access, such as international bonds
  • Being able to access investment strategies that are not readily available to individuals
  • Professional fund managers can provide the expertise to invest in a variety of different markets, that the individual may have little knowledge or experience with.

These benefits do however come at a cost. There are management fees associated with the running and administration of managed funds, known as the investment cost ration (ICR) and is often expressed as a percentage.

Active vs passive

Passive funds are also known as index funds, and as the names suggest, they passively invest in the constituents of a particular index such as the S&P/ASX 200 share index. As such, the performance of these funds will generally be very close to the performance of the index. Passive funds tend to be cheaper, as there is no investment expertise being offered.

Active funds on the other hand are actively managed by the fund manager, with the objective of outperforming a particular index, or in some cases, not following an index at all and trying to just get a positive absolute return.

Research

There are a huge number of managed funds that are available for investment – literally thousands, and they not without risks It’s important for investors to fully consider each individual managed fund on its merits.

Lonsec provide comprehensive research on managed funds with a comparison and filter table, whereby you can find the type of fund you are after quickly. The downloadable Viewpoint pdf report provides  information of what the fund is, performance tables, how to use the fund in a portfolio, the “rating” of the fund, Lonsec’s overall opinion of the fund, fund manager profile, Lonsec’s suggested risk profile suitability, and it’s strengths and weaknesses.

CLICK HERE for more information on research for managed funds.

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