As discussed in our last blog Time to Invest in Your Future everyone is an investor to some degree, even if it is only in terms of which bank we decide to deposit our earnings with or the type of superannuation fund we have chosen to join.
Those wishing to be more active in their investing might do well to consider doing so via a managed fund.
Managed funds offer access to a wide range of investment opportunities and types (some of which are available only via managed funds) with the significant added benefit of having expert investment managers and financial advisers helping you make informed decisions about the options best suited to your financial objectives. In a managed fund, your money is pooled with other investors and the combined capital is invested by a professional fund manager (also known as an investment manager) across a diverse range of areas including shares, bonds, listed property trusts and more.
This means that instead of you having to decide how, when and where to allocate every individual dollar – what percentage to shares, what to bonds, what to property, which shares, which bonds, Australia or international, when, for how long, when do I change the mix and so on – once you decide to invest with managed funds, your financial adviser and fund manager bring their expertise to bear in making these decisions for you.
Members of the fund are usually paid income or distributions periodically, with the value of their investment rising or falling with the value of the underlying assets.
Active or passive investing
The easiest way to invest in managed funds is via what is called passive investing. Passive managed funds (also known as index funds) simply buy a computer-generated portfolio of assets that mimic an index, such as the All Ordinaries Index. These funds are cheaper than active funds as all you are paying for is the computer generated index.
In terms of returns, passive funds never outperform the index they are tracking. In active managed funds, the fund managers proactively work to maximise the returns of your invested capital and that of the other members of the fund. Actively managed funds cost more than passively managed funds as you pay for the expertise and activity of the fund manager.
The role of the financial adviser in managed funds
At first blush, investing in managed funds may seem relatively simple, and one of its initial attractions is the ease of entry to the market.
However, managed funds do involve complexity and the need to make a range of strategic decisions. Your financial adviser has a key role to play at all stages of the managed fund process.
Before making the decision to invest in managed funds it is important, as with all financial decisions, to ensure that the choices you are considering are aligned with your short, medium and long-term financial goals and match your (appetite for) risk profile.
(Hopefully you already have an overall financial plan in place in the form of a Statement of Advice (SoA) from your financial adviser. If not, it would be highly prudent to put such a plan in place. You can read more about the financial planning process in the earlier Falconer Advisers blog Smart People Make Smart Decisions.)
Portfolio construction
The next step in the managed funds process is to meet with your financial adviser to work on the construction of an investment portfolio. This portfolio consist of various asset classes or types (such as Australian and international shares, fixed interest, infrastructure and property) which are chosen with the intention of helping you meet your financial objectives and timelines.
Decisions are then made as to how much of each class to allocate to your portfolio. This process is called asset allocation.
Determining the right mix of asset types and the proportion of each type within your investment portfolio is essential to successful investing. When this mix is right, you have what is known as a diversified portfolio. Put simply, diversification means spreading investments across a variety of different asset classes or within an asset class to reduce risk and maximise your opportunity for success.
Choosing the right managed funds
There are literally hundreds of managed funds in Australia, and as with any service or company, some are simply better than others.
As part of its service to clients, Falconer Advisers and its financial service licensee company Hillross conduct rigorous research on and screening of all potential managed funds so that only the best funds make it on to our official Research List. As part of this process these selections are cross-checked with independent third party rating houses. Different managed funds have expertise in different areas of investing. They also display different approaches to investing and areas of emphasis.
For example “growth funds” focus on companies with the potential for faster than average growth and offer higher potential capital appreciation but potentially at above-average risk, whereas “value funds” seek to identify companies whose stock prices don’t necessarily reflect their fundamental worth.
There are also “growth at a reasonable price (GARP) funds” which mix growth and value based approaches.
As part of ensuring that your investments are full diversified, Falconer Advisers will recommend that you invest in a number of different managed funds to maintain a diversified portfolio best suited to your financial goals.
Ongoing review
Over time your financial needs will change. To ensure that your mix of managed funds best reflects your current financial needs, Falconer Advisers undertakes constant ongoing review of the performance of your funds in relation to your financial objectives and provides regular updates and recommendations regarding any strategic adjustments that need to be made.
You can also access your portfolio online at any time and we encourage all members of managed funds to maintain an active interest in their performance.
To find out more about managed funds and their place in an overall well-balanced financial plan please call me on 03 9600 4111 or email me on robert@falconeradvisers.com.au.