January 2002 Volume 83 Number 1 "serving the protectors"
Shares
By Ruth McCance, ASX Investor Education

Where do managed funds fit in?

Share investors have many choices when deciding where to place their money. Some of these choices include owning shares indirectly through buying units in a managed share fund, or owning shares directly in your own name. Before deciding, there are several points to consider.

When buying shares directly, you are able to choose exactly where you would like to place your money by selecting from the 1,400-plus companies listed on the ASX in six different industry sectors. You could identify opportunities that a fund manager who focuses on the top 200 companies might miss. You might also receive special shareholder discounts, if offered, such as discounts on goods and services, and get access to shares in a company floating on the stock exchange.

Shares do incur brokerage when you buy or sell. However, there are no ongoing costs. For instance, to create a portfolio consisting of $1,000 worth of stock in 10 different shares, buying them through a discount broker at $30 a trade, it would cost the investor $10,000 for the shares and a total of $300 brokerage. If in the future the investor wanted to sell these shares, it would cost a further $300.

Investing in managed funds also incurs costs. Managed funds generally charge entry and exit fees, which are normally structured and levied at about 5 per cent of the value of the investment (however, these can often be circumvented by going through a wholesale distributor), plus an ongoing management fee of around 2 per cent per annum, which pays for a team of investment professionals to conduct extensive ongoing investment research. Fees do vary widely from fund to fund, so it is wise to do some research.

The argument against paying an ongoing management fee is that 2 per cent compounded over a number of years can equal a lot of money – money that moderately experienced investors with some time and interest could save themselves. The argument in favour is that, for the inexperienced, or those with little time, the input from a fund manager may be worth it.

So how much time do you need? Investing directly does involve time to research companies and keep up to date with market movements. However, this need not be a major task. A long-term investor (five – seven years) will generally need to review the shares he or she owns every quarter, or if a specific need arises, such as a takeover.

The major plus for smaller investors is that managed funds offer low-cost access to a diversified, professionally managed portfolio of assets. With this type of investment you can start with a minimum of $1,000 and deposit $100 per month. By pooling funds with other investors you can diversify a small amount of money into a number of different industry sectors which would be out of your reach on your own.

Investors are almost spoilt for choice by the many different types of funds available, from Australian share funds, international funds, future leaders, property trusts and more. There is a full list of funds printed regularly in the Australian Financial Review. More experienced investors often use niche funds to access a particular area, such as biotechnology, ethical investments or emerging companies.

There is a wealth of information available on managed funds. The website www.assirt.com.au provides comparisons and analysis of fund performances. Also, Shares Magazine and the Australian Financial Review (AFR) have some good information. When choosing a fund, it is generally wise to think longer-term. Consider the three-, five- and 10-year performances of the fund. This first quarter 2001, most funds saw the value of their investments go down. Funds are not immune to the volatility of the market and, as a rule, chasing (avoiding) last year’s winner (loser) is not a reliable way to pick future performance. Long-term track records are usually better indicators. One quick warning: some funds will quote annualized returns based on one quarter’s performance. This is a forecast and not the actual return for the last year.

Whatever your investment goals, or amount you want to invest, it is likely that indirect investments have an important role to play. Whether investing directly or indirectly, the important thing is to think longer-term and do your homework before deciding.

This was prepared with the assistance of the ASX Investor Education unit. It is not intended as investment advice or as a recommendation of specific securities. For more information call 1300 300 279 or visit www.asx.com.au

This article contains general information only. It is not intended as and must not be relied upon as investment advice. You should consult a licensed professional advisor prior to making any investment decision.

The information contained in this article is provided in good faith and derived from sources believed to be accurate as at the date of publication. However, no warranty of accuracy or reliability as to such information is given. Australian Stock Exchange Limited and its associated and related companies will not be liable for any loss or damage arising in any way from or in connection with anything provided in or omitted from this article or from any action taken or inaction in reliance on the article. This article does not contain an invitation or offer to invest in securities or other financial products and nothing in this article is to be taken as ASX endorsing promoting or expressing any opinion on any securities or other financial products.

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