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© 2013 Reed International Books Australia Pty Limited trading as LexisNexis. Permission to download and make copies for classroom use is granted. Ancillary.

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Presentation on theme: "© 2013 Reed International Books Australia Pty Limited trading as LexisNexis. Permission to download and make copies for classroom use is granted. Ancillary."— Presentation transcript:

1 © 2013 Reed International Books Australia Pty Limited trading as LexisNexis. Permission to download and make copies for classroom use is granted. Ancillary for Financial Planning in Australia, 5th edition by Taylor and Juchau. Powerpoint created by Amanda Taylor Financial Planning in Australia 5TH EDITION Sharon Taylor Roger Juchau

2 © 2013 Reed International Books Australia Pty Limited trading as LexisNexis. Permission to download and make copies for classroom use is granted. Ancillary for Financial Planning in Australia, 5th edition by Taylor and Juchau. Powerpoint created by Amanda Taylor Investing in Managed Funds CHAPTER 11

3 © 2013 Reed International Books Australia Pty Limited trading as LexisNexis. Permission to download and make copies for classroom use is granted. Ancillary for Financial Planning in Australia, 5th edition by Taylor and Juchau. Powerpoint created by Amanda Taylor OVERVIEW Managed funds play a major role in financial services in Australia and throughout the world Funds are structured in different ways and may be listed or unlisted Fund objectives will be reflected in their asset allocations The relationship fund managers have with investors is critical Many different types of funds exist Funds provide investors with a range of useful services

4 © 2013 Reed International Books Australia Pty Limited trading as LexisNexis. Permission to download and make copies for classroom use is granted. Ancillary for Financial Planning in Australia, 5th edition by Taylor and Juchau. Powerpoint created by Amanda Taylor A managed fund is a type of financial services organisation that receives money from its investors (known as unit-holders) and then invests those funds on their behalf in a diversified portfolio of securities (or other assets). Managed funds have been a part of our investment landscape for many years. What is a Managed Fund?

5 © 2013 Reed International Books Australia Pty Limited trading as LexisNexis. Permission to download and make copies for classroom use is granted. Ancillary for Financial Planning in Australia, 5th edition by Taylor and Juchau. Powerpoint created by Amanda Taylor Advantages Diversification; unit-holders benefit from holdings spread out over a wide variety of industries and companies, thus reducing the risk inherent in any one investment. Full-time professional management, which relieves investors of any day-to-day management and record-keeping chores. The fund may be able to offer better investment talents than individual investors can provide. Most managed fund investments can be started with a modest capital outlay. Pros and Cons of Managed Funds

6 © 2013 Reed International Books Australia Pty Limited trading as LexisNexis. Permission to download and make copies for classroom use is granted. Ancillary for Financial Planning in Australia, 5th edition by Taylor and Juchau. Powerpoint created by Amanda Taylor Advantages Services; auto re-investment etc Convenient administration Widely quoted prices Deal in fractions of units Easy to acquire Long-term focus Pros and Cons of Managed Funds

7 © 2013 Reed International Books Australia Pty Limited trading as LexisNexis. Permission to download and make copies for classroom use is granted. Ancillary for Financial Planning in Australia, 5th edition by Taylor and Juchau. Powerpoint created by Amanda Taylor Disadvantages Managed funds in general can be costly and involve substantial transaction costs. — Many funds carry sizeable commission charges when entering and/or exiting the fund. — A management fee is levied annually for the professional services provided. Most do no better than the market as a whole. Lack of control and no direct ownership. Timing of realisation of capital gains. Pros and Cons of Managed Funds

8 © 2013 Reed International Books Australia Pty Limited trading as LexisNexis. Permission to download and make copies for classroom use is granted. Ancillary for Financial Planning in Australia, 5th edition by Taylor and Juchau. Powerpoint created by Amanda Taylor With the help of a professional adviser: Determine what proportion of the portfolio should comprise managed funds and what investment style is most appropriate (that is, value/income, growth, aggressive growth). Identify those funds with the highest returns over the past two or three years — although past returns are usually a poor guide to future performance, research suggests that, on average, they will continue to outperform over the short- to medium- term. Identify those funds with the highest star ratings assigned by ratings services such as Morningstar. How Investments are made in Managed Funds

9 © 2013 Reed International Books Australia Pty Limited trading as LexisNexis. Permission to download and make copies for classroom use is granted. Ancillary for Financial Planning in Australia, 5th edition by Taylor and Juchau. Powerpoint created by Amanda Taylor For these top performing and highly rated funds, determine the management expense ratio for each — large management fees can significantly reduce long-run wealth. Find a financial adviser, investment adviser or managed fund service that minimises the costs associated with investing in managed funds. Invest in a range of top performing, highly rated, low-cost managed funds across different fund managers. Review your portfolio of managed funds annually and consider weeding out the poor performers. How Investments are made in Managed Funds

10 © 2013 Reed International Books Australia Pty Limited trading as LexisNexis. Permission to download and make copies for classroom use is granted. Ancillary for Financial Planning in Australia, 5th edition by Taylor and Juchau. Powerpoint created by Amanda Taylor An investment in a managed fund represents an ownership position in a professionally managed portfolio of securities. When you buy shares (known as units) in a managed fund (commonly known as a trust fund, because the money in the fund is held in trust for the benefit of the unit- holders), you become a part owner of a portfolio of securities. Investment Diversification

11 © 2013 Reed International Books Australia Pty Limited trading as LexisNexis. Permission to download and make copies for classroom use is granted. Ancillary for Financial Planning in Australia, 5th edition by Taylor and Juchau. Powerpoint created by Amanda Taylor A managed fund combines the investment capital of many people who have similar investment goals and invests the funds for those individuals in a wide variety of securities. The whole managed fund idea, in fact, rests on the concept of pooled diversification, which works very much like health insurance, whereby individuals pool their resources for the collective benefit of all the contributors. Investment Diversification

12 © 2013 Reed International Books Australia Pty Limited trading as LexisNexis. Permission to download and make copies for classroom use is granted. Ancillary for Financial Planning in Australia, 5th edition by Taylor and Juchau. Powerpoint created by Amanda Taylor Various functions — investing, record keeping, safekeeping and others — are often split among two or more companies. — The fund itself is organised as a separate trust and is owned by the unit- holders, not by the firm that runs it. — The management company runs the fund’s daily operations. They sell fund units, either directly to the public or through authorised dealers such as major brokerage houses and banks. Usually the management firm also serves as investment manager. — The investment manager buys and sells shares or bonds and otherwise oversees the portfolio. Structure and Management

13 © 2013 Reed International Books Australia Pty Limited trading as LexisNexis. Permission to download and make copies for classroom use is granted. Ancillary for Financial Planning in Australia, 5th edition by Taylor and Juchau. Powerpoint created by Amanda Taylor Usually three parties participate in managing the investments. The portfolio manager, who actually runs the portfolio and makes the buy and sell decisions; Securities analysts, who analyse securities, look for viable investment candidates and make recommendations to the portfolio manager; and Traders, who buy and sell big blocks of securities at the best possible price. Structure and Management

14 © 2013 Reed International Books Australia Pty Limited trading as LexisNexis. Permission to download and make copies for classroom use is granted. Ancillary for Financial Planning in Australia, 5th edition by Taylor and Juchau. Powerpoint created by Amanda Taylor The trustee (or custodian) safeguards the securities and other assets of the fund, without taking a role in the investment decisions. The trustee ensures that the investment manager complies with the investment, reporting and other rules of the fund as set out in the trust deed. Structure and Management

15 © 2013 Reed International Books Australia Pty Limited trading as LexisNexis. Permission to download and make copies for classroom use is granted. Ancillary for Financial Planning in Australia, 5th edition by Taylor and Juchau. Powerpoint created by Amanda Taylor All persons dealing in securities or providing investment advice must be licensed by the Australian Securities and Investments Commission (ASIC), and funds must provide an approved prospectus to potential investors. Access is available to the industry ombudsman (through the Financial Industry Complaints Service (FICS)) for investors who incur losses due to administrative mistakes made by fund managers. More specific regulation of the activities of managed funds is found in the Commonwealth Managed Investments Act, which was enacted in July Regulating Managed Funds

16 © 2013 Reed International Books Australia Pty Limited trading as LexisNexis. Permission to download and make copies for classroom use is granted. Ancillary for Financial Planning in Australia, 5th edition by Taylor and Juchau. Powerpoint created by Amanda Taylor The term managed fund is commonly used to describe an investment trust where investors buy their units in a fund, the fund issues new units and fills the purchase order with those new units. All managed funds stand behind their units and buy them back when investors decide to sell. There is never any trading between individuals. These unlisted funds (known as open-end funds in the United States) are the dominant type of managed funds. Many of these funds are very large and hold hundreds of millions of dollars worth of securities. Unlisted Funds

17 © 2013 Reed International Books Australia Pty Limited trading as LexisNexis. Permission to download and make copies for classroom use is granted. Ancillary for Financial Planning in Australia, 5th edition by Taylor and Juchau. Powerpoint created by Amanda Taylor Li sted funds (known as closed-end funds in the United States) are managed funds that operate with a fixed number of units outstanding and do not regularly issue new units. In effect, they have a capital structure like that of a company, except that the company’s business happens to be investing in marketable securities or other assets. Units in listed funds, like those of an ordinary share, are actively traded in the secondary market. Unlike unlisted funds, all trading in listed funds is done between investors on the open market. Listed Funds

18 © 2013 Reed International Books Australia Pty Limited trading as LexisNexis. Permission to download and make copies for classroom use is granted. Ancillary for Financial Planning in Australia, 5th edition by Taylor and Juchau. Powerpoint created by Amanda Taylor Entry and exit fees The question of whether a fund charges entry fees only concerns investors in unlisted funds. The entry fee of an unlisted fund is the charge levied on an investor when units in a fund are bought. Entry fees, when charged, can be fairly substantial and can amount to as much as 5% of the purchase price of the units (though only a handful of funds today charge this maximum rate). Fees and Charges

19 © 2013 Reed International Books Australia Pty Limited trading as LexisNexis. Permission to download and make copies for classroom use is granted. Ancillary for Financial Planning in Australia, 5th edition by Taylor and Juchau. Powerpoint created by Amanda Taylor Up-front: An up-front commission is paid to the financial salesperson. It is typically around 4%. Management expense ratio (MER): An annual fee paid to cover investment management costs, sales commissions (called a trail), advertising, marketing and administration. A trail commission: An annual fee paid each year to the adviser making the original sale. It is included as part of the MER. The average trail is 0.5% but can be up to 1%. Exit fees: Charged by some funds if you choose an alternative fee structure to an up- front commission. Fees and Charges

20 © 2013 Reed International Books Australia Pty Limited trading as LexisNexis. Permission to download and make copies for classroom use is granted. Ancillary for Financial Planning in Australia, 5th edition by Taylor and Juchau. Powerpoint created by Amanda Taylor Feeder fund fees: Where an investment fund feeds to other managers, often called a feeder fund, there may be a stacking of fees, encouraging you to leave the money with the head manager. Adviser service fee: The investor must sign off with the adviser to this fee. It is paid directly to the adviser and is in addition to the up-front and trail commission, not a substitute for these fees. Fees and Charges

21 © 2013 Reed International Books Australia Pty Limited trading as LexisNexis. Permission to download and make copies for classroom use is granted. Ancillary for Financial Planning in Australia, 5th edition by Taylor and Juchau. Powerpoint created by Amanda Taylor Aggressive growth funds So-called performance funds that tend to increase in popularity when markets heat up, Aggressive growth funds are highly speculative investment vehicles that seek large profits from capital gains. Also known as capital appreciation or small- cap funds, many are fairly small, and their portfolios consist mainly of high-flying shares. Categories of Managed Funds; Aggressive Growth

22 © 2013 Reed International Books Australia Pty Limited trading as LexisNexis. Permission to download and make copies for classroom use is granted. Ancillary for Financial Planning in Australia, 5th edition by Taylor and Juchau. Powerpoint created by Amanda Taylor Growth Funds The objective of a growth fund is simple: capital appreciation. Long-term growth and capital gains are the primary goals of such funds. Therefore, growth funds invest principally in well-established, large- or mid-cap companies that have above-average growth potential. Categories of Managed Funds; Growth

23 © 2013 Reed International Books Australia Pty Limited trading as LexisNexis. Permission to download and make copies for classroom use is granted. Ancillary for Financial Planning in Australia, 5th edition by Taylor and Juchau. Powerpoint created by Amanda Taylor Equity-income funds Emphasise current income by investing primarily in high-yielding shares. Capital preservation is also important, and so are capital gains, although capital appreciation is not a primary objective of equity-income funds. Categories of Managed Funds; Equity-Income

24 © 2013 Reed International Books Australia Pty Limited trading as LexisNexis. Permission to download and make copies for classroom use is granted. Ancillary for Financial Planning in Australia, 5th edition by Taylor and Juchau. Powerpoint created by Amanda Taylor Balanced funds Tend to hold a balanced portfolio of both shares and bonds for the purpose of generating a well-balanced return of both current income and long-term capital gains. In many respects, they are much like equity-income funds, but balanced funds usually put more into fixed-income securities. Categories of Managed Funds; Balanced

25 © 2013 Reed International Books Australia Pty Limited trading as LexisNexis. Permission to download and make copies for classroom use is granted. Ancillary for Financial Planning in Australia, 5th edition by Taylor and Juchau. Powerpoint created by Amanda Taylor Growth-and-income funds Seek a balanced return made up of both current income and long-term capital gains, but they place a greater emphasis on growth of capital. Unlike balanced funds, growth- and-income funds put most of their money into equities. It is not unusual for these funds to have 80–90% of their capital in ordinary shares. Categories of Managed Funds; Growth-and-Income

26 © 2013 Reed International Books Australia Pty Limited trading as LexisNexis. Permission to download and make copies for classroom use is granted. Ancillary for Financial Planning in Australia, 5th edition by Taylor and Juchau. Powerpoint created by Amanda Taylor Fixed-interest funds (or bond funds) Invest exclusively in various types and grades of bonds — from Commonwealth Treasury bonds to corporate bonds and debentures. Income is the primary investment objective, although capital gains is not ignored. Categories of Managed Funds; Fixed-Interest

27 © 2013 Reed International Books Australia Pty Limited trading as LexisNexis. Permission to download and make copies for classroom use is granted. Ancillary for Financial Planning in Australia, 5th edition by Taylor and Juchau. Powerpoint created by Amanda Taylor Government bond funds Mortgage-backed bond funds High-grade corporate debenture funds Convertible bond funds Long-term bond funds Types of Fixed Interest Funds

28 © 2013 Reed International Books Australia Pty Limited trading as LexisNexis. Permission to download and make copies for classroom use is granted. Ancillary for Financial Planning in Australia, 5th edition by Taylor and Juchau. Powerpoint created by Amanda Taylor Cash management trusts (CMTs) Established to buy and sell short-term money market instruments — bank certificates of deposit, Treasury notes and the like. Categories of Managed Funds; CMT

29 © 2013 Reed International Books Australia Pty Limited trading as LexisNexis. Permission to download and make copies for classroom use is granted. Ancillary for Financial Planning in Australia, 5th edition by Taylor and Juchau. Powerpoint created by Amanda Taylor There are two main kinds of CMTs: General-purpose money funds, which invest in any and all types of money market investment vehicles, from Treasury notes and bank CDs to corporate commercial paper. The vast majority of CMTs are of this type. They invest their money wherever they can find attractive short-term yields. Government securities funds, which were established as a way to meet investor concerns for safety. Types of CMT

30 © 2013 Reed International Books Australia Pty Limited trading as LexisNexis. Permission to download and make copies for classroom use is granted. Ancillary for Financial Planning in Australia, 5th edition by Taylor and Juchau. Powerpoint created by Amanda Taylor ‘If you can’t beat ‘em, join ‘em.’ That saying pretty much describes the idea behind index funds. Essentially, an index fund is a type of managed fund that buys and holds a portfolio of shares (or bonds) equivalent to those in a market index such as the ASX All Ordinaries Index (the All Ords). Buy & Hold Strategy. Categories of Managed Funds; Index

31 © 2013 Reed International Books Australia Pty Limited trading as LexisNexis. Permission to download and make copies for classroom use is granted. Ancillary for Financial Planning in Australia, 5th edition by Taylor and Juchau. Powerpoint created by Amanda Taylor One of the hottest products is the so- called sector fund, a managed fund that restricts its investments to a particular sector, or segment, of the market. These funds concentrate their investment holdings in one or more industries that make up the sector at which they are aiming. Categories of Managed Funds; Sector

32 © 2013 Reed International Books Australia Pty Limited trading as LexisNexis. Permission to download and make copies for classroom use is granted. Ancillary for Financial Planning in Australia, 5th edition by Taylor and Juchau. Powerpoint created by Amanda Taylor For example, a health care sector fund would focus on such industries as pharmaceutical companies, hospital management firms, medical suppliers and biotech concerns. The portfolio of a sector fund would then consist of promising growth shares from these particular industries. Types of Sector Fund

33 © 2013 Reed International Books Australia Pty Limited trading as LexisNexis. Permission to download and make copies for classroom use is granted. Ancillary for Financial Planning in Australia, 5th edition by Taylor and Juchau. Powerpoint created by Amanda Taylor Known as socially responsible funds, they actively and directly incorporate ethics and morality into the investment decision. Their investment decisions revolve around both morality and profitability. Socially responsible funds consider only certain companies for inclusion in their portfolios; if a company does not meet the fund’s moral, ethical or environmental tests, fund managers simply will not consider buying the shares, no matter how good the bottom line looks. Categories of Managed Funds; Ethical

34 © 2013 Reed International Books Australia Pty Limited trading as LexisNexis. Permission to download and make copies for classroom use is granted. Ancillary for Financial Planning in Australia, 5th edition by Taylor and Juchau. Powerpoint created by Amanda Taylor These funds spread investors’ money across different types of markets. That is, whereas most managed funds concentrate on one type of investment — whether shares, bonds or money market securities — asset allocation funds put money into all these markets. Many of them also include foreign securities in the asset allocation scheme, and some even include inflation resistant investments, such as gold or real estate. Categories of Managed Funds; Asset Allocation

35 © 2013 Reed International Books Australia Pty Limited trading as LexisNexis. Permission to download and make copies for classroom use is granted. Ancillary for Financial Planning in Australia, 5th edition by Taylor and Juchau. Powerpoint created by Amanda Taylor In their search for higher yields and better returns, Australian investors have shown a growing interest in foreign securities. Sensing an opportunity, the managed fund industry was quick to respond with a proliferation of so-called international funds — a type of managed fund that does all or most of its investing in foreign securities. Categories of Managed Funds; International

36 © 2013 Reed International Books Australia Pty Limited trading as LexisNexis. Permission to download and make copies for classroom use is granted. Ancillary for Financial Planning in Australia, 5th edition by Taylor and Juchau. Powerpoint created by Amanda Taylor Automatic investment plan — allows fund shareholders to automatically funnel fixed amounts of money from their pay or bank accounts into a managed fund. It is much like a payroll deduction plan, where investments to your managed fund are automatically deducted from your pay or bank account. Fund Services to Investors

37 © 2013 Reed International Books Australia Pty Limited trading as LexisNexis. Permission to download and make copies for classroom use is granted. Ancillary for Financial Planning in Australia, 5th edition by Taylor and Juchau. Powerpoint created by Amanda Taylor An automatic reinvestment plan can be one of the real attractions of managed funds. Whereas automatic investment plans deal with money the unit-holder is putting into a fund, automatic reinvestment plans deal with the distributions the funds pay to their unit-holders. Through this service, dividend and/or capital gains income is automatically used to buy additional units in the fund. Automatic Reinvestment Plans

38 © 2013 Reed International Books Australia Pty Limited trading as LexisNexis. Permission to download and make copies for classroom use is granted. Ancillary for Financial Planning in Australia, 5th edition by Taylor and Juchau. Powerpoint created by Amanda Taylor Managed funds have a service to meet this kind of need, called a regular withdrawal plan. Once enrolled in one of these plans, an investor automatically receives a predetermined amount of money every month or quarter. Withdrawal Plans

39 © 2013 Reed International Books Australia Pty Limited trading as LexisNexis. Permission to download and make copies for classroom use is granted. Ancillary for Financial Planning in Australia, 5th edition by Taylor and Juchau. Powerpoint created by Amanda Taylor Sometimes investors find it necessary to switch out of one fund and into another. The investor’s investment objectives or the investment climate itself may have changed. Conversion (or exchange) privileges were devised to meet the needs of such investors in a convenient and economical manner. Investment management companies that offer a number of different funds — known as fund families — often provide conversion privileges that enable shareholders to move easily from one fund to another, possibly even by phone. Indeed, with phone switching you simply pick up the phone to move among funds — the only constraint being that the switches must be confined to the same family of funds. Conversion Plans

40 © 2013 Reed International Books Australia Pty Limited trading as LexisNexis. Permission to download and make copies for classroom use is granted. Ancillary for Financial Planning in Australia, 5th edition by Taylor and Juchau. Powerpoint created by Amanda Taylor Managed funds can be used by individual investors in a variety of ways: 1. as a way to accumulate wealth; 2. as a storehouse of value; and 3. as a speculative vehicle for achieving high rates of return. Investor Uses of Managed Funds

41 © 2013 Reed International Books Australia Pty Limited trading as LexisNexis. Permission to download and make copies for classroom use is granted. Ancillary for Financial Planning in Australia, 5th edition by Taylor and Juchau. Powerpoint created by Amanda Taylor Accumulation of wealth is probably the most common reason for using managed funds. Basically, the investor uses managed funds over the long haul to build up investment capital. Depending on the investor’s personality, a modest amount of risk may be acceptable, but usually preservation of capital and capital stability are considered important. The whole idea is to form a partnership with the managed fund in building up as big a capital pool as possible. Accumulation of Wealth

42 © 2013 Reed International Books Australia Pty Limited trading as LexisNexis. Permission to download and make copies for classroom use is granted. Ancillary for Financial Planning in Australia, 5th edition by Taylor and Juchau. Powerpoint created by Amanda Taylor Investors may also use managed funds as a storehouse of value. The idea here is to find a place where investment capital can be fairly secure and relatively free from deterioration yet still generate a relatively attractive rate of return. Storehouse of Value

43 © 2013 Reed International Books Australia Pty Limited trading as LexisNexis. Permission to download and make copies for classroom use is granted. Ancillary for Financial Planning in Australia, 5th edition by Taylor and Juchau. Powerpoint created by Amanda Taylor Speculation is not a common use of managed funds; the reason, of course, is that most managed funds are long-term in nature and thus not meant to be used as aggressive trading vehicles. However, a growing number of funds (for example, sector funds) now cater to speculators, and some investors find that managed funds are, in fact, attractive outlets for speculation and short-term trading. Speculation

44 © 2013 Reed International Books Australia Pty Limited trading as LexisNexis. Permission to download and make copies for classroom use is granted. Ancillary for Financial Planning in Australia, 5th edition by Taylor and Juchau. Powerpoint created by Amanda Taylor Income distributions Capital gains distributions Unrealised capital gains (or paper profits) What about future performance? MER — Costs Personnel Risk/Return Profile Performance over several years Independent Research — Morningstar Measuring Performance

45 © 2013 Reed International Books Australia Pty Limited trading as LexisNexis. Permission to download and make copies for classroom use is granted. Ancillary for Financial Planning in Australia, 5th edition by Taylor and Juchau. Powerpoint created by Amanda Taylor Income distributions received Capital gains distributions received Change in NTA Holding Period Return (HPR) — With and without reinvested dividends and capital gains Measuring long-term returns Returns on listed funds Measures of Return

46 © 2013 Reed International Books Australia Pty Limited trading as LexisNexis. Permission to download and make copies for classroom use is granted. Ancillary for Financial Planning in Australia, 5th edition by Taylor and Juchau. Powerpoint created by Amanda Taylor This chapter has covered: The role and scope of managed funds The advantages and disadvantages of investing through managed funds Structure and operations of managed funds Fund objectives and the implications for asset allocations The investment relationship between fund managers and investors Types of funds Measurement of returns The services provided to investors Summary


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