Lomas - How to Invest in Managed Funds

CONTENTS

By the same author:

How to Make Your Money Last as Long as You Do

How to Create an Income for Life

(published by Wrightbooks)

First published 2002 by Wrightbooks

an imprint of John Wiley & Sons Australia, Ltd

33 Park Road, Milton, Qld 4064

Offices also in Sydney and Melbourne

Typeset in 10.5/12.6 pt Bookman Old Style

Margaret Lomas 2002

National Library of Australia

Cataloguing-in-Publication data

Lomas, Margaret.

How to invest in managed funds.

Includes index. ISBN 0 701636 37 8.

1. Investments - Australia. 2. Mutual funds - Australia.

I. Title.

332.6327

All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without the prior permission of the publisher.

Cover design by Rob Cowpe

Disclaimer

The material in this publication is of the nature of general comment only, and neither purports nor intends to be advice. Readers should not act on the basis of any matter in this publication without considering (and if appropriate, taking) professional advice with due regard to their own particular circumstances. The author and publisher expressly disclaim all and any liability to any person, whether a purchaser of this publication or not, in respect of anything and of the consequences of anything done or omitted to be done by any such person in reliance, whether whole or partial, upon the whole or any part of the contents of this publication.

PREFACE

When I told people I had decided to write this book, those who knew me let out horrified gasps as if I was planning a defection of some sort. That an advocate of property investing should want to inform people of the benefits and drawbacks of investing in managed funds was tantamount to treason! In the same way that die-hard share investors claim there is no good alternative, those who adamantly believe in property investing often never consider anything else!

Yet, property lover that I am, I am first and foremost a financial adviser, and one who is painfully aware of the need to keep a diversified and balanced portfolio. Granted, property over time performs very nicely, thank you, but what if for one reason or another you are unable to invest in property at any given moment? You will want an alternative, and unless you are educated about the benefits of investing in a range of options, you will not be in possession of the information you need to make sound investment decisions.

So, let me reassure you, yes, I still believe completely in positive cash flow property as an investment which will provide you with a sound income in retirement. However, I am also aware that managed funds have their place in a balanced portfolio and need to be understood.

For example, what if:

• You have a little too much cash to be happy with the sad rates of interest offered by a bank but not enough to form a deposit on property?
• You have had a very bad experience with direct property (perhaps with the help of misleading advice from a sincere-looking salesperson) yet would still like to invest in a vehicle with a property focus?
• You do not want to make such a big commitment for your first investment?
• You need a vehicle to help you get enough deposit (in the absence of other property) on a residential investment property?
• You are retired, with property holdings which you would like to begin to liquidate (that is, sell down), and need a place to put the cash where you can get it quickly?

There are any number of reasons, all very valid, for you to be seeking information about managed funds. Whatever your personal motivation, you will find within this book enough information to help you with your investment decision.

While sorting through the information available about managed funds and collating my own knowledge, it was difficult to decide just what to include and what to leave out! The amount of technical information was amazing, and at one stage my head was swimming to the point where I began to wonder if writing this book had been such a wise idea after all.

But then I asked myself, What would you be looking for in a book on managed funds? The answer is, of course, that you would be looking for information which will assist you to match a fund with your needs, and increase your confidence when it comes to truly understanding what is happening with your money.

The result is a guide which will give you enough of an understanding of managed funds to be able to ask the right questions. And, just as importantly, you will be able to see how managed funds are assessed for performance, and know some of the internal mechanics of a particular fund's operations. You will be able to identify your own personal financial objectives, and then select a fund which satisfies these needs. You will be able to see that the return on a managed fund is relevant only where it can satisfy your own requirements in terms of risk, income and growth.

Armed with this knowledge, you will be ready to explore further, and ready to examine what's on offer and make some decisions based on facts, rather than on feelings or the great tip you got from your best mate!

Margaret Lomas

Ourimbah, NSW

January 2002

Chapter 1

WHAT IS A MANAGED FUND?

• Managed funds collectively pool investor monies
• Managed funds allow small investors to invest in a wider range of options
• Managed funds invest in a variety of assets
• Most managed funds are unlisted trusts
• Managed funds are governed by the Managed Investments Act 1998

A managed fund is the collective pooling of money for the purposes of investing. Managed funds present opportunities to people who would like to be involved in investing, yet would prefer to defray some of the risk by investing with others. They provide a vehicle which allows an investor to acquire an exposure to the investment of his or her choice, with a range of advantages (and, of course, some disadvantages too!).

To explain, let us look at the following example. Imagine you would like to own a racehorse, and you have $100,000 to spend. You know very little about horseflesh, so you listen to a few other people, read a book or two, use your instincts and choose one you feel will do well.

One of two things will happen. You are either right, and you make money each time the horse wins. Or you are wrong, and you lose everything (although at least you can ride the horse on weekends!).

As an alternative, you join 10 racing syndicates, putting $10,000 into each syndicate to buy 10 horses (one per syndicate). You have decreased the amount of money it is possible to win, yet increased the chance you have of getting a winning horse. The returns may be lower but the chances of a return are greater.

Managed funds... [allow] your small amount of money [to] buy part of an entire portfolio of investments.

Managed funds follow the same principle. Your small amount of money buys part of an entire portfolio of investments. In effect, you have a little piece of a lot of different things pieces which, if you were on your own, you would not be able to buy but that collectively with others you can. This type of investing is known as indirect investing, as opposed to direct investing, which occurs when you invest alone.

Managed funds employ experienced people to make the day-to-day decisions about what to do with the money at hand. Due to changes in the law (see Chapter 7) the same people who manage your money hold ultimate responsibility to you for the money. These people by law must use due diligence to manage your funds effectively, in order to achieve the best possible results according to the individual objectives of the particular fund.