Managed investments

If you do not want to actively manage a share portfolio you can choose a form of managed investment.  A managed investment means pooling your money with others for a professional fund manager to invest on your behalf.  There are a number of types of managed investments and this article explores some of the pro's and con's of each.

Managed funds

Unlike buying shares directly, managed funds are not traded on the stock market and you have to buy ‘units’ in the managed fund from the fund manager. Managed funds then invest the pooled money, usually by buying shares in listed companies (possibly the same ones you would be buying if you bought shares directly!)

Advantages

• Small amounts – You can start with as little as $2000 and invest small amounts each month.
• Exposure – You can choose to invest in a variety of managed funds which will give you different exposure to different asset classes. For example some managed funds invest in international listed shares, something which the average investor may not want to do.
• Potential growth – The value of the units you hold should grow over time as the value of the underlying assets that the managed fund holds grow. You can redeem your units, usually by filling out a redemption form.

Disadvantages

• Open ended - This means the fund accepts funds and withdrawals at any time. This flow of funds may trigger buying and selling decisions by the fund manager at price points that are less than ideal thus affecting the total annual returns.
• Forced selling - If there is a rush of withdrawals from a given fund, the fund manager may be forced to sell large amounts of assets. This bulk selling may drive the fund’s asset values down further and trigger even more withdrawals.
• Tax - The buying and selling of assets within the fund will have taxation consequences for your units that are outside your control and that you are unaware of until well after the end of the financial year when you receive your Annual Tax Statement from the fund.
• Returns - Given the number of funds and the relatively large amount of money they have to invest, it is statistically difficult for many of them to outperform the overall market index so your particular fund may generate below market returns.
• Fees - Similar to brokerage, the fees charged by a fund can significantly impact your returns.

Listed investment companies

A Listed investment company is an alternative to investing directly in shares or buying units in a managed fund.

Advantages

• Close ended - Unlike a Managed Fund, investors buy and sell shares in LICs via the stock exchange. This allows the LIC to focus on investment goals without having to factor in flows of cash in and out of the investment pool.
• Tax benefits - Again, unlike a Managed Fund, shares in a LIC do not carry unknown tax consequences for the buyer or seller.
• Low costs - Well established LICs often charge management expenses well below similar unlisted Managed Funds.
• Transparency - As listed entities on the stock exchange, LICs must comply with the exchange’s compliance and transparency regulations.

Disadvantages

• Small amounts - LICs cannot be traded in partial shares so investing small amounts may not be possible.
• Liquidity - Some LICs (like some company shares) are thinly traded which may make buying and selling shares difficult.
• Volatility - As listed entities, LICs are exposed to the overall volatility of the market.
• Net tangible asset backing – The share may be worth more or less than the underlying share value which means you need to consider this when you time your purchases and sales.

Exchange traded funds

An Exchange traded fund (ETF) is another alternative to investing directly in shares, buying units in a managed fund or investing in LIC’s. An Exchange Traded Fund is similar in concept to a Managed Fund but it has shares listed on the stock exchange, which can be bought and sold just like direct shares or shares in a Listed Investment Company. ETFs typically invest in a basket of shares to mimic a particular index.

Advantages

• Diversification - ETFs can provide instant diversification for an investment portfolio.
• Liquidity - The large size of most ETFs mean their shares usually trade with a high degree of liquidity, allowing you to easily buy and sell.
• Transparency - ETFs must comply with the stock exchange’s compliance and transparency regulations, including daily reporting of their full holdings.

Disadvantages

• Small amounts- As listed entities, buying and selling will involve brokerage costs, which may be prohibitive to investing small amounts.
• Index like returns - ETFs, since they are designed to mimic an underlying index, will not produce spectacular, above market returns.
• Liquidity – Some small ETFs may have low liquidity which may make buying and selling difficult.