Should I invest in managed funds?

What are managed funds:

A managed fund is when a responsible entity (the fund manager) invests your money on your behalf. This money is typically pooled with funds contributed from other investors, allowing the fund manager to allocate an appropriate level of resources towards managing the funds.

Typically, a fund manager’s goal is to beat the returns of market (i.e outperform the market).

However, managed funds may also exist to serve a specific purpose, which may include:

• To provide a consistent income stream to a client, while having a low risk of capital loss
  

• To provide high capital growth, via the selection of high growth assets
  

• To strike a balance between providing capital growth and a consistent income stream, while managing downside risk
  

Typically, fund managers will invest in shares on your behalf, however managed funds that invest in property (REITS, for Real Estate Investment Trusts) are becoming more popular.

For those seeking an income stream, there are also fund managers that invest in more conservative investments such as bonds.

Accordingly, a select portfolio of managed funds can, in theory, provide a good combination of steady income stream, capital growth and diversity.

The problem with managed funds:

Now that managed funds have been established for long enough, history shows us that the promise of managed funds have not been kept.

In fact, the majority of fund managers do not beat the market return after their fees are taken into account.

The brutal truth of the managed fund industry is that their expertise, administration costs and handling fees come at a cost, and any superior returns that they can generate, are not generally enough to beat a humble index fund once their fees are accounted for.

So if superior performance is far from guaranteed, under what circumstances would someone invest in a managed fund?

For me, there are several reasons why utilising a managed fund may be worthwhile:

• You have actually found a fund manager that has consistently outperformed the market, and you expect they will continue to do so long-term.
  

• You want access to investments outside your expertise (i.e. investing in renewable energy or high growth companies).
  

• You want access to investments where it would otherwise be more difficult for you to invest (i.e. international investments).
  

• You want to achieve a specific objective such as a high income return while having minimal risk of capital loss.
  

• You are not comfortable undertaking the investment process yourself.

In this case, be aware of the limitations of managed funds, and invest away.

My financial planner has invested me in managed funds, what should I do?

Despite the noted performance issues and fee drag that investing in managed funds may entail, financial planners love putting their clients in managed funds. I suspect there are two reasons for this.

Firstly, the fund managers are responsible for the money invested, and should be actively managing the portfolio to achieve good returns. This alleviates part of the financial planner’s responsibility. It is much cheaper for a fund manager to make investing decisions for 500,000 clients at once, then it is for one financial planner to individually service 500,000 clients (which is not even possible).

Second of all, if something goes wrong with a managed fund, it is much easier for the financial planner to say it is the fund manager’s fault, rather than the blame resting on the financial planner themselves. If the mistake is deemed to be bad enough to move the investment, it’s generally as simple as completing a form and giving the sell order. The financial planner does so, avoids further complaints, and is seen to be taking action. Much better than the blame resting with the financial planner where the solution is to change planners.

If you are concerned about the number of managed funds you are invested in, the solution is easy, speak to your financial planner, and hold them accountable for the investments they have made on your behalf.

In addition, make sure that these investments are achieving their specific objectives, and where the goal of the fund is to beat the market, ensure this is the case once their fees are taken into account. If not, I would seriously question the use of managed funds in your portfolio compared with investing in index funds instead.

Who are managed funds good for:

Managed funds are likely to suit people where they want to delegate decisions to others.

Where they are not overly concerned about beating the market, or prefer to outsource investment decisions for peace of mind.

Where people are not able to compile their own portfolio of investments to manage their risks (for example a portfolio of direct shares, index funds, cash and fixed interests), a managed fund may work for them.

Ultimately, most people are invested in managed funds through their superannuation.

For me, it therefore makes sense to invest elsewhere for personal investments.