Problems with Guided Answers by Roger Juchau
© 2013 Reed International Books Australia Pty Limited trading as LexisNexis. Permission to
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CHAPTER 11: Investing in Managed Funds
1
The following data is for three equity funds:
Fund
Net
assets
Min
$m
invest
Return % pa
MLO
4.43
$1,000
1 Yr
−4.96
3 Yr
15.02
GIST
NEFN
3.43
2.01
$3,000
$5,000
−7.62
−11.30
12.43
9.82
Entry
%
Exit %
MER %
pa
5 Yr
18.52
5.13
—
0.85
16.17
14.64
4.00
—
—
4.10
1.65
2.44
Comment on their performance and compare them with the top fi ve equity funds listed
by Morningstar at your date of enquiry.
Funds vary in performance and costs to investors. Funds are argued to give investors, over the
long run, superior performance on share investments. In selecting the funds shown, an investor
would note the returns and their movement over various time intervals. Whilst five-year returns
are attractive, some attention must be given to the range of fees and costs of each fund. An
investor may also examine the professional ratings of each fund and also fund performance
against comparable funds. Some investors prefer high fee/cost funds, since they may generate
superior services and often superior returns, given a long-term investment horizon.
Morningstar ratings can be reviewed and compared online. Comparison should focus on five-year
returns and the MER.
2
An Australian equity fund has invested in the following shares. Look at share prices in the
ASX tables and compare them to 52 weeks ago. Given current ASX trends, would you
alter the proportions?
What other information would you seek to fully assess the selection of those shares for
the fund?
ASX Code
BHP
RIO
ANZ
AGK
CBA
QBE
CSL
WES
WOW
BHP
Rio Tinto
ANZ Bank
AGL
Commonwealth Bank
QBE Insurance
CSL
Wesfarmers
Woolworths
%
18
16
13
12
10
9
8
8
6
Financial Planning in Australia 5e Problems Ch11
Page 1
Each student will account differently for value change and alteration of proportions depending on
the date of the problem assignment. In assessing performance, the returns and costs of the fund
would be important as would its ratings, its index comparison and its position in league tables
generated by advisers and the financial media. Other information would be the standing of the
managers of the fund and whether large institutional investors continue to support it. Super funds
investments are useful references in this regard.
Online sources, Morningstar and Yahoo Finance, supply important information. A cross-check
with ASX and ASIC is important to see whether there are regulatory issues with shares
nominated.
3
You are considering investing in a fi xed-income security fund because it off ers
stability in income. Look at two bonds funds, BT Australian Bond Fund and
Russell Australian Bond
Fund, and compare their returns today and 52 weeks ago. Account for any
changes in
returns performance over this period.
Any account of changes would include movements in market interest rates, changes in
demand for bond funds, changes in ratings and new competition from other bond funds
and any evaluations done in the press and in online financial media.
4a
A year ago, YZ Fund was trading at $77, when its NTA was $71. Today the fund is
quoted
at a price of $84, while its NTA stands at $89.99. If the fund paid $1.04 to
shareholders
over the past year, what is the holding period return (based on share price) on YZ
Fund?
The return can be determined on both NTA based and market price based data.
NTA based
Change in NTA ($79.99 – $65)
Distributions
Return
Holding period return =
16.03
65
$
14.99
1.04
16.03
=
24.6%
Market price based
Change in price ($74 – $67)
Distributions
Return
$
7.00
1.04
8.04
Holding period return =
=
8.04
67
Financial Planning in Australia 5e Problems Ch11
12%
Page 2
4b
A year ago, an investor bought 400 units of a managed fund at $9.50 per unit; over
the past year, the fund has made an income distribution of 70 cents per unit and
had a capital gains distribution of 85 cents per unit. Find the investor’s holding
period return, given that this fund now has a net tangible asset value of $11.10.
Return for the year (all changes on a per unit basis):
Change in price ($11.10 – $9.50) $1.60
Income distributions
0.70
Capital gains distributions
0.85
Total return
$3.15
Holding period return
=
$3.15
$9.50
=
33.2%
5
You have uncovered the following per-unit information about a certain listed fund:
2011
2012
2013
46.20
43.20
2.10
1.83
64.68
60.47
2.84
6.26
61.78
57.75
2.61
4.32
55.00
51.42
46.20
43.20
64.68
60.47
Ending unit prices ($):
Offer
NTA
Income distributions
Capital gains distributions
Beginning unit prices:
Offer
NTA
Evaluate this fund’s performance 2011 to 2013, identifying changes requiring
further investigation.
Ending (offer) price
Purchase (offer) price
Net increase/(decrease)
Return for the year:
Income distributions
Capital gains distributions
Net increase in price
Total return
Holding period return
(Total return/Purchase price)
2011
$46.20
55.00
($ 8.80)
2012
$64.68
46.20
$18.48
2013
$61.78
64.68
($2.90)
$2.10
1.83
(8.80)
($4.87)
–8.9%
$2.84
6.26
18.48
$27.58
59.7%
$2.61
4.32
(2.90)
$4.03
6.2%
Volatilities in returns and offer prices need scrutiny and review over a five-year period.
Financial Planning in Australia 5e Problems Ch11
Page 3
3-year Compounded Rate of Return:
Begin
a
b
c
Income
Capital Gains
Closing NTA
Net Cash Flow
–51.42
–51.42
2011
2.10
1.83
2012
2.84
6.26
3.93
9.10
2013
2.61
4.32
57.75
64.68
Using a financial calculator, the three-year average annual compounded rate of return is: 16.14%.
6
You have been approached by a conservative investor for guidance on investing in property and
property managed funds. He is concerned about the drawbacks of investing directly in property or
indirectly in property managed funds (REITs). Outline how a conservative investor may balance the
risks of both investments, medium to long-term.
Conservative investors usually prefer listed funds short and long term, since they can readily
liquidate their investments when adverse conditions are likely. While unlisted funds may offer less
volatility, they can be problematical in adverse conditions and may hold back returns to investors
if their liquidity tightens. Less conservative investors may hold some unlisted funds where their
assets are in a strong sector of the economy. Features of funds are detailed in the section ‘Listed
and unlisted funds’ in Chapter 11. Balancing of risks is conditioned by economic conditions — in
strong economic conditions, conservative investors may add well-performed unlisted funds to
their portfolio of funds.
7
Listed below is the 10-year, per-unit performance record of Tom and Nicole’s Growth
Fund:
Income
distributions
Capital
gains
distributions
Net tangible
asset value:
Beginning
of year
End of year
2013
$0.83
2012
$1.24
2011
$0.90
2010
$0.72
2009
$0.46
2008
$0.65
2007
$0.37
2006
$0.26
2005
$0.33
2004
$0.58
2.42
3.82
-
9.02
6.84
1.78
3.69
1.88
1.23
9.92
58.60
52.92
44.10
59.85
55.34
37.69
35.21
34.25
19.68
29.82
64.84
58.60
52.92
44.10
59.85
55.34
37.69
35.21
34.25
19.68
Use this information to fi nd the fund’s rate of return over the three-year period
2011–13 and the 10-year period 2004–13.
Return for the three-year period: (Return = $29.95)
a Income
b Capital Gains
c Closing NTA
Net Cash Flow
2013
0. 83
2.42
64.84
68.09
2012
1.24
3.82
2011
0.90
5. 06
0.90
Financial Planning in Australia 5e Problems Ch11
2010
- 44.10
- 44.10
Page 4
Compounded return for the l0-year period: (Compounded return 21.1%)
2013
0.83
2012
1.24
b) Capital
gains
2.42
3.82
c) Closing
NTA
64.84
Net Cash
Flow
68.09
a) Income
2011
0.90
2010
0.72
2009
0.46
2008
0.65
2007
0.37
2006
0.26
2005
0.33
9.02
6.84
1.78
3.69
1.88
1.23
2004 2003
0.58
9.92
–
29.82
5.06
0.90
9.74
7.30
2.43
4.06
2.14
1.56 10.50
–
29.82
8
Your uncle wishes to invest in the Rally Fund which has performed well over five
years. He supplies you the details below. He is worried about the future risk and
volatility of share returns in the fund. He tells you the fund requires a minimum
investment of $1,000 and an ongoing fee of 4.1%. How would you advise your
uncle about this investment and what he should monitor if he were to invest in this
fund?
Fund
Rally Fund
S&P/ASX 200 Accumulation Index
1 Yr %
39.0
23.7
3 Yr % PA
32.6
23.4
5 Yr % PA
31.2
21.3
Top 10 Stocks
%
Sectors the Fund is invested in
%
BHP Billiton (BHP)
Rio Tinto (RIO)
ANZ Bank (ANZ)
ASX Limited (ASX)
Commonwealth Bank (CBA)
QBE Insurance Group (QBE)
Wesfarmers (WES)
CSL (CSL)
AGL (AGK)
Telstra
16.64
10.30
6.57
5.87
5.15
4.56
4.04
3.78
3.59
3.35
Financial services
Materials
Industrials
Healthcare
Consumer discretionary
Consumer staples
Cash
Energy
IT
Telecommunications
31
28
9
9
7
5
4
3
2
2
The response of students will be conditioned by the date of the assigned case and current views
about the Accumulation Index as a yardstick.
In advising the uncle, reference must be made to ratings and performance of the fund as
disclosed in the financial media and by the rating agencies. Of course he would need to compare
the fund’s performance and costs against similarly constituted funds. In reviewing the fund, he
could examine the sector weightings and monitor whether the fund has been rebalancing these
weightings in light of ASX performance, economic trends, global changes and the fortunes of
firms in the sector (eg, Telstra). He would need to check whether there were significant changes
in the managers of the fund and any related comment in the media. The disclosed data of the
fund performance in the table would give confidence to the uncle. The uncle’s risk profile and
return expectations will also have to be factored into any advice given. Also, the uncle could be
given historical share performance data (20-year horizons) to secure a realistic view of returns.
Financial Planning in Australia 5e Problems Ch11
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