Understanding Managed Funds
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Important note: While every care has been taken in the preparation of this document,
AMP Capital Investors Limited (ABN 59 001 777 591, AFSL 232497) and AMP Capital Funds
Management Limited (ABN 15 159 557 721, AFSL 426455) makes no representations or
warranties as to the accuracy or completeness of any statement in it including, without
limitation, any forecasts. Past performance is not a reliable indicator of future performance.
This document has been prepared for the purpose of providing general information,
without taking account of any particular investor’s objectives, financial situation or needs.
An investor should, before making any investment decisions, consider the appropriateness
of the information in this document, and seek professional advice, having regard to the
investor’s objectives, financial situation and needs. This document is solely for the use
of the party to whom it is provided.
...
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Understanding Managed Funds
About AMP Capital
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Since we started life back in 1849 as the investment management arm of AMP Society, our commitment to delivering outstanding
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Table of contents
What are managed funds?
3
Why invest in managed funds? 4
Getting started
> Ways to invest
4-5
> How much do I need to start?
5
> What should I do before investing?
5
Measuring performance
> How does unit pricing work?
6
> How do distributions affect unit prices?
6
What are the costs of investing?
7
Risks of investing in managed funds
7
1
As at 31 March 2014.
2
What are managed funds?
Managed funds, also known as managed investment schemes,
unit trust, mutual funds, or simply ‘funds’, allow you to pool
your money together with other investors so that you can invest
in a range of assets that may otherwise be out of your reach.
Managed funds give you access to the expertise of trained
investment professionals who constantly research and monitor
investment markets for opportunities that meet the funds’
investment objectives, as it is the investment manager, not the
investor, who has day-to-day control of the managed fund.
When you invest in a managed fund you become a ‘unit holder’,
acquiring units in the fund. The value of your investment will
rise or fall with the market value of the underlying assets, and
consequently the value of your investment will vary from time
to time. Most managed funds offer a regular investment plan
so that smaller investors can build wealth steadily by investing
regularly.
However, when you invest in a managed fund, you should be
aware that:
>> Returns are not guaranteed – future returns may differ from
past returns, and the level of returns may vary,
>> The value of your investment may vary, and there may be the
risk of loss of invested capital.
There are various types of managed funds. Some focus on a
particular asset class, such as property, while others invest in a
combination of assets (across shares, property, infrastructure,
bonds and cash) – see the table below for more information.
Name
Description
Multi-asset, or
diversified funds
Multi-asset, or diversified funds, invest across a range of asset classes and sectors. The
investment strategy of the particular fund determines the mix of assets.
Multi-asset funds may be categorised as:
>> Balanced funds: Generally speaking, balanced fund portfolios have a 70% allocation to growth
assets such as shares and property, and a 30% allocation to defensive assets such as bonds
and cash.
>> Growth funds: Growth funds typically have a higher proportion of their assets invested in shares
and property so bring the potential for higher return and carry a higher risk than balance funds.
>> Income funds: These funds are invested primarily in income-producing assets such as fixed
income. These funds aim to distribute income on a regular basis.
>> Capital stable funds: Capital stable funds generally invest up to 70% in defensive assets such as
bonds and cash, and around 30% in growth assets such as shares and property.
Single asset funds
These funds invest in a single asset class, for example fixed income, property or shares.
See below a snapshot of the asset classes available to investors:
>> Shares (or equities) offer strong growth potential. When a fund buys a share, it becomes a part
owner or ‘shareholder’ of the company.
>> Real estate is a physical ‘bricks and mortar’ investment which provides the potential for capital
growth. Income and value is also driven by rents that are paid by tenants under contractually
binding leases.
>> Infrastructure assets can offer investors stable inflation-linked cash flows and capital growth
potential. These assets represent the opportunity to access the utilities and facilities that provide
essential services for economic growth.
>> Bonds are a debt instrument where funds are loaned to an entity (corporate or government) for
a defined period of time at a fixed interest rate. Bonds focus on providing capital protection and
income.
>> Cash investments (such as bank bills) have a relatively short investment time frame and can
provide low-risk income in the form of regular interest payments.
3
Why invest in
managed funds?
Some key benefits of investing in a managed fund include:
Diversification
A vital strategy that seeks to manage risk. By spreading
investments across different fund managers, companies,
industries, sectors and/or countries, managed funds aim to
lessen the risk that one bad investment will significantly reduce
the overall value of the portfolio. To achieve this level of
diversification on your own, you would need large sums to invest.
For example: If you were to invest $1,000 into Australian
shares, you wouldn’t be able to do much in terms of
diversification. However, if you purchased units in a
managed fund (say Australian equities managed fund) then
your $1,000 may be invested across hundreds of Australian
companies, giving you greater diversification.
Professional management
Managed funds are managed by a professional fund
management team who research, select and monitor your
investments, as well as provide regular reporting. They are
experts on the economic climate and how it can affect your
investments. Fund managers will have access to research and
resources that most individual investors do not.
Access to sophisticated investments
When you invest in a managed fund you have access to a
broader range of assets that may not be readily available (or
affordable) to smaller individual investors. You can access a
broad range of assets or markets with a relatively small amount
of cash.
Liquidity
Like shares, managed funds are generally liquid assets. This
means that if you want, you may redeem parts or all of your
share/units at a given time (restrictions may apply), although
there are some less liquid funds. Unlike shares, you don’t need
to pair up a buyer and seller in order to establish a buy/sell
transaction.
Some considerations
Getting started
Ways to invest
Depending on the managed fund, you may be able to invest:
Direct (off-platform)
This is where you deal directly with the fund manager to invest
in the fund. Depending on individual situations, this option
may be appropriate for investors with minimal administrative
requirements that want to self-manage their investment and
make their own selections without the involvement of a
third-party.
On-platform
This is where you go through a third-party, administrative
platform to invest in the fund. This option may be appropriate
for investors or advisers that need to manage a number of
managed funds, resulting in a deluge of paperwork. That’s
because, investing via a platform simplifies the management
of multiple managed funds in your portfolio by consolidating
all the investment reporting and administration for you, and
sending you regular portfolio valuations and tax statements.
As a result of these added services and functionalities, you may
incur an administration fee for using the platform.
On platforms, there are two options to consider, including:
Master trusts
A master trust is an investment vehicle that allows many
investors to pool their money together and invest in one or
more investments, usually wholesale funds. They are managed
by a trustee who holds the investments on their behalf. They
usually offer a menu of wholesale managed funds from a
variety of fund managers. Investors can choose from the
investment menu or choose a general investment objective and
the trust manager selects the particular investments. Platform
fees and tax provisions are usually bundled into the unit price.
Wraps
A wrap account is basically a custodial, or administrative, service
with all the investments made under the investor’s name. The
investments can be managed funds or direct investments,
such as shares bought by the investor. A trustee is appointed to
oversee the portfolio but the investments are still held in the
investor’s name. Platform fees, tax credits and any loans are
separated from the unit prices.
The value of your investment may also be affected by the
fund specific risks and by other risks or external factors such
as the state of the Australian and world economies, consumer
confidence and changes in laws and regulations including tax
laws and government policies relating to managed funds.
In addition to understanding the types of managed funds
available (see page 3), there are a few different options to
consider when choosing a particular managed fund.
These include:
Factors such as your age, the length of time you intend to hold
your investment, other investments you may hold, and your
personal risk tolerance will affect the levels of risk for you as an
investor. As the risks noted in this booklet do not take factors
such as these into account, you should consider obtaining
financial advice before making a decision about investing or
reinvesting in a managed fund.
Multi-manager funds or ‘fund-of-funds’
Fund-of-funds invest in a range of other funds. They are designed
to be a one-stop solution for investors, blending a range of
specialist investment managers in a single fund. They aim to
provide diversification across asset classes, manager types and
manager styles.
4
Actively managed funds
Actively managed funds are those where the fund manager
aims to outperform the market or underlying index by
frequently buying and selling securities that they believe are
going to do better than others. Typically, actively managed
funds are more expensive than passive funds as you are paying
for the investment skills of the fund manager.
Some active managers will be more successful than others,
depending on their respective skill sets, so it’s important that
investors make the right choice when hiring a manager in the
context of their needs and the prevailing environment.
Passive funds
Passive investment funds, also known as index funds, simply
buy a portfolio of assets that mimic an index, such as the All
Ordinaries Index or the S&P/ASX 200 Index. Index funds aim to
generate a return, before fees, that is almost the same as the
index it is tracking (some funds may have timing delays).
For example, exchange traded funds (ETFs) are typically passive
index tracking investments that can be bought or sold on a
secondary market such as the Australian Securities Exchange
(ASX) listing market. Typically, index funds are cheaper as you
are not paying for investment expertise. Investors wanting to
invest directly in an index fund have a limited choice of fund
managers in Australia.
How much do I need to start?
One reason why managed funds are so popular in Australia
is that you don’t need thousands of dollars to get started.
Generally, you will need a minimum of $5,000 to invest in a
managed fund, although some funds will allow you to get
started for as little as $1,000. Many funds also offer a savings
plan which allows you to build your investment through regular
and ongoing contributions into the fund. The fact that monies
are pooled together to create a larger fund, significantly reduces
the costs associated with buying and selling individual shares.
Managed funds make it easy for you to start investing but you
should regularly review your investments and make sure that
they suit your needs.
What should I do before investing?
When investing in a managed fund, please be aware that:
>> Unit pricing fluctuates and the value of your investment can
fall with the loss in value of units
>> Tax losses from the managed funds cannot be distributed
individually; they must be retained in the fund to offset
against future potential gains
>> You will have no direct control over when assets are sold
>> Fees vary from fund to fund so you need to be mindful
of the fees that apply to various transactions on such as
withdrawals – see page 7 for more information.
The risks noted on page 7, do not take into account your
personal circumstances, so you should consider the following
before making a decision about investing:
>> Read the relevant Product Disclosure Statement for full details
on the terms and conditions that apply to your investment
>> Read the fund’s Information Memorandum and any other
associated documents
>> Go to the Australian Securities and Investments Commission’s
consumer website ‘Money Smart’, where you’ll find more
information about managed funds, fees and withdrawal rights
>> Conduct your own independent investigations and analysis of
the fund, and
>> Obtain appropriate financial, legal and tax advice.
5
Measuring performance
Similar to shares in a company, you buy units in a managed fund
that are all equally valued. If the assets held by the fund go up,
the unit price also rises. When the fund makes a profit by selling
assets in the fund, or if the assets in the fund generate income,
it will be passed on to fund holders in the form of ‘distributions’.
The value of each unit in the fund is determined by the Net
Asset Value (NAV), which represents the total assets of fund less
fees and other costs. Typically, NAV is calculated on a per
To determine the current value of your investment, you simply
multiply the current unit price by the number of units that you
hold.
share basis.
The unit price reflects the value of the fund’s investment. That is
the net value of the assets in the fund pertaining to the relevant
class of units divided by the number of units that have been
issued in that class. As the value of the investments rises and
falls, so does the unit price. Unit prices will also usually fall after
the end of distribution period.
An example:
Let’s say investors collectively provide $1million to a fund
manager to invest. The fund manager will issue one million
units each at $1. If you invested $5,000, you will receive
5,000 units in the fund. Let’s say after five years the fund
turns the original $1million into $1.2million (after fees and
costs). So the Net Asset Value is now $1.2million, or $1.20
per unit. In another words your $1 per unit has increased
to $1.20 per unit which in effect has increased your initial
investment of $5,000 to $6,000.
Source: AMP Capital, for illustrative purposes only
How does unit pricing work?
Your money buys units into the fund that vary in price
depending on market conditions and the underlying value of
the assets of the fund. This unit price is calculated by taking
the total market value of all of a fund’s assets on a particular
day, adjusting for any liabilities, and then dividing the net fund
value by the total number of units held by all investors on that
day. Although your unit balance in a fund will stay constant
(unless there is a transaction on your account), the unit price
will change according to changes in the market value of the
investment portfolio, or the total number of units issued for
the fund.
Value of your investment:
Current unit price x number of units held
How do distributions affect unit prices?
During the year, the fund you’re invested in will earn income
in the form of dividends and interest. It may also make profits
on investments sold. Under current tax law, the fund must
pay all of this income and realised capital gains to investors
as a ‘distribution’. These distributions usually occur at the end
of June and December. Investors who have elected to reinvest
their distributions are allocated additional units in the fund.
Alternatively, investors may choose to receive their distributions
as a deposit to their bank account. The unit price of a fund
will fall by the amount of any distribution immediately after
the distribution is paid. Those who reinvest receive additional
units in the fund instead of cash. As a result, their investment
is worth exactly the same after the distribution as it was
immediately before the distribution.
6
What are the costs
of investing?
Risks of investing in
managed funds
Like any professional service, fund managers charge a fee to invest
and manage your money. Fund managers don’t all charge fees in
the same way, that is, some may charge entry fees, while others
may charge exit fees as well as management costs and other fees.
The value of your investment may be affected by fund-specific
risks. Managed funds often invest in securities that are listed on
share markets.
Fees charged generally fall into one of three categories:
>> Fees for moving your money in or out of a fund: For example,
contribution fees, withdrawal fees and termination fees
>> Management costs: The fees for managing and administering
your investments
>> Service fees: For example, special request and switching fees
Please note: Transaction costs, such as brokerage and stamp duty,
could apply whenever you contribute, withdraw or switch from one
fund to another. There is usually a small difference between the
purchase price and selling price of the units, which reflects these
transaction costs. This is often known as the buy/sell spread. Please
ensure that you read the Product Disclosure Statement (PDS) for
full details of the fees and costs that apply to your investment.
This means that the fund will be affected by any risks associated
with these securities. This includes how they perform, their
strategy, management, how sustainable their earnings are, and
other factors that affect the value and performance of a security.
If some of the investments in the managed fund are managed
outside of Australia, factors such as exchange rates may have a
negative effect on investment returns.
There are other fund specific risks for other types of managed
funds. Before choosing to invest in any managed fund, you
should read the Product Disclosure Statement and incorporated
information for that fund, and consider factors such as the likely
investment return, the risks of investment and your investment
timeframe.
Contact us
If you would like to know more about how AMP Capital can help you, please visit ampcapital.com.au.
This document is solely for the use of the party to whom it is provided and must not be
provided to any other person or entity without the express written consent of AMP Capital.
Certain information in this document identified by footnotes has been obtained from
sources that we consider to be reliable and is based on present circumstances, market
conditions and beliefs. We have not independently verified this information and cannot
assure you that it is accurate or complete
ref:
Important note: While every care has been taken in the preparation of this document,
AMP Capital Investors Limited (ABN 59 001 777 591, AFSL 232497) (AMP Capital) makes
no representation or warranty as to the accuracy or completeness of any statement in it
including, without limitation, any forecasts. Past performance is not a reliable indicator
of future performance. This document has been prepared for the purpose of providing
general information, without taking account of any particular investor’s objectives,
financial situation or needs. An investor should, before making any investment decisions,
consider the appropriateness of the information in this document, and seek professional
advice, having regard to the investor’s objectives, financial situation and needs.