SMSF Investing Education & Strategies

Managed Funds

Managed Funds are one of the most popular investment vehicles around the world. They effectively pool together the monies of many separate investors into one large pool, and then invest and manage that one pool of money on behalf of the investors.

They are generally established as unit trusts, whereby each investor is issued with and owns units in the trust, based on the proportion of their investment to the overall assets of the trust. The common feature of managed funds is the use of a fund manager, which is generally a team of investment professionals who's job it is to manage the money of the fund to the best of their ability for the benefit of the investors, and are paid a fee from the fund for this role.

There are literally thousands of managed funds available to investors in Australia, and cover a wide range of asset classes including:

- Australian Shares
- International Shares
- Property
- Fixed Interest
- Mortgages
- Cash
- Diversified funds, which combine different proportions of some or all of the above
- Hedge Funds, which can invest in not only any of the above asset classes, but also trade in derivatives, foreign exchange, utilize short selling, and any other type of investment it sees fit. Most Hedge funds try to be "absolute return" funds, that is they try and make money no matter what direction the markets are heading. Nice concept, not all succeed.

Wrap Accounts

Wraps are investment platforms that enable you to electronically buy and sell (via an online order pad) managed funds that are available on their list. These tend to be wholesale funds, which (as seen below) are lower cost that regular retail funds, however you will pay a 'platform fee' for the wrap account itself so in the end its much the same. Apart from the online transaction feature, the other benefits of a wrap account are that they provide you with consolidated performance and tax reporting for all your funds within the wrap.

Fees

Managed Funds have fees. They can be:

- Entry Fees : up to 5% of the invested amount for retail funds, usually 0% for wholesale funds.
- Management Fees : around 1% for wholesale funds, around 2% for retail funds. 
- Performance Fees : up to 25% of performance - mainly found in Hedge funds, but also some others
- Wrap fees : if you use a wrap account, you'll pay around 0.9% pa on top of the wholesale fund fees (no entry fees on them), and this fee usually scales down with account size. For very large balances, they can get down to around 0.3% pa. Note that not all wrap accounts will allow you to access their product without the use of a financial adviser, who will also charge a fee on top of those already listed.

Try not to pay entry fees on managed funds if your a direct investor. These are actually commissions for fund sellers, and there are now plenty of online providers who will enable you to avoid entry fees.

You can also try to reduce your management fee costs if your a direct investor in a retail fund. Part of the fee is actually a commission that goes somewhere - historically to an adviser who has recommended the product to you, or to an online company that has "facilitated" your entry into that fund. Some of these providers are now also capping this to a smaller amount.

Find a Fund

Looking for good quality managed funds is not too hard if you know where to look.  Morningstar is the main research house for managed funds and the website www.morningstar.com.au allows you to search for managed funds based on several criteria such as performance, asset class, fund manager name, fund rating etc.

For hedge funds, the website www.fundmonitor.com.au provides information on absolute return / hedge funds that are available to Australian investors, both wholesale and retail.