A unit trust may be defined as a financial vehicle through which people invest their money. It is aimed at assisting investors to achieve better deals for their investments by pooling the savings of individuals, groups as well as institutions (Sampson, 2000). It serves as a safe and excellent way for wealth accumulation for the investors. The fund managers of unit trusts invest the pooled savings in proper securities ensuring that the investors enjoy maximum security of their savings. In this case, unit trust provide a better way of investing as opposed to investing in direct company shares because the managers of the unit trusts invest in the best company shares on offer on behalf of the investors. Each investor in a unit trust receives what are referred to as units depending on the size and the value of his or her savings.
A cash management trust invests in securities available in the short term money markets such as government securities, securities guaranteed by banks and other financial institutions and promissory notes offered by blue-chip companies. Its aim is mainly to provide security for investments which allow ready access and earn some short term returns on the incomes. On the other hand, an equity trust can be simply defined as a unit trust which invests the funds placed under its management in shares (Archie, 2002). A diversified fund is a type of investment which comprises of a variety of securities which an investor can choose from. Diversification minimises the degree of risks in the fund since the activities or failure of one sector does not affect that of the other sectors.
An asset class refers to a group of securities which posses similar characteristics, are governed by the same rules and regulations and exhibit almost similar behaviours once at the marketplace (Archie, 2002). There are three main groups of asset classes which include; equities or stocks, fixed incomes also known as bonds and cash equivalents also referred to as instruments in the money market. In addition to these three, real estate investments and commodities are also at times classified in the asset class. Examples of asset classes thus include various types of investments such as stocks, cash, real estates and bonds.
Perpetual analysis from the Perpetual Investment Management Limited (PIML) in Australia have shown that there has been major revolutions in the among the asset classes for the last 20 years with about occasions among which the last year’s worst performer becomes the following year’s best performer. The average returns for the various asset classes in the Australian stock market are as follows: Shares = 11%, Property = 9%, Bonds = 8% and Cash = 10%.
Various asset classes have performed differently over the last 20 years. It is not very easy to tell the overall worst and the best since they keep improving and fluctuating in terms of their performance in the investment markets due to several factors such as interest and exchange rates, prices of different commodities as well as environmental factors. However, from the contemporary perpetual analysis reviewed it can be said that for the last 20 years, property investments are the best performing while international shares are the worst performers in the Australian investment market.
A managed fund refers to an investment fund which is properly managed professional experts who are responsible for investing the investors money pooled in the fund. In a managed fund, an individuals money is combined with that of other investors to establish one large fund which when invested in the stock market increases the share buying strength and leaps huge benefits for the investors (Don, 2004). The four major types of managed funds include unit trusts, Superannuation funds, Insurance Bonds and Group Investment Funds.
These four types of managed funds are quite similar although they slightly differ in the way they manage the investors funds. A unit trust operates by pooling savings invested by individuals and uses it to buy shares in a variety of investments. A Group Investment Fund is similar to a Unit Trust but it differs in that while a unit trust fund requires a separate Trustee Corporation which is quite independent if the fund manager in a GIF, the manager and the Trustee are one and the same person.
Superannuation Funds differ from the other managed funds in that the funds invested require some time to reach maturation and before this period matures, the funds can only be accessed under special cases such as death of the investor or redundancy of the investments. Insurance Bonds refer to certain policies which are linked to investments offered by insurance companies. They are more like unit trusts in terms of flexibility but they differ in the way they are taxed depending on the insurance status.
Answers from the Tables.
NOTE: For the answers given in questions 7-20, the following key will be used.
[A] refers to COLONIAL FIRST STATE INVESTMENTS LTD: Colonial First State MIF – Balanced Fund.
[B] refers to MACQUARIE INVESTMENT MANAGEMENT LTD: Macquarie Flexible Inv – Managed Growth.
[C] refers to MLC INVESTMENT LIMITED: MLC MKey InvSer/UT Horizon 3-Cons Gr.
[D] refers to AMP CAPITAL INVESTORS: AMP FLI-AMP Equity Fund.
[A];- to invest in cash, shares and fixed interest.
[B];- to invest in growth assets with some exposure assets which are able to produce income.
[C];- has no precise objectives.
[D];- to facilitate asset allocation.
Classes the funds invest in and the distribution between asset classes.
[A] mainly invests in cash, fixed interests and shares asset classes. The distribution between the classes is 20-25% Australian shares, 50- 60% cash and interests and finally, 4-5% property.
[B] invests in shares and property. The distribution between this asset classes is “Australian shares 35-55% (45%); international shares 15-35% (25%); property 0-20% (10%); Australian fixed interest 0-20% (5%); international fixed interest 0-10% (5%); CPI bonds 0-10% (5%); alternative assets 0-10% (5%); cash 0-20%. ”
[C] invests mainly in shares and properties.
[D] invests in cash and shares. Distribution between the two asset classes is 0% Cash (0-20%); 100% Australian Shares (80-100%).
Size of the funds.
[A] Fund size is $194. 11 million.
[B] Fund size is $13. 67 million.
[C] Fund size is $ 261. 23 million.
[D] Fund size is $ 147. 62 million
Rating system for the Funds.
The morning star Fund rating system is used whereby the number of stars indicate how each individual fund is rated. The respective funds have the following ratings:
[A] has two stars.
[B] has five stars.
[C] has three stars.
[D] has three stars.
Fees payable for each Fund.
According to report as at September 23, 2008, the following details are available about fees for each fund.
[A]; Standard contribution fee is 3. 00% inclusive of GST. The Commonwealth Securities rebate 100% of the contribution fee when you invest using a PDS obtained from the Fund. All rebates are paid to the investor in form of additional units. A trailing commission of 0. 44% per annum is paid by the Fund manager from the resources accumulated.
[B]; the standard contribution fee, rebate and trailing commission is similar to that of [A] and in addition, the investor can choose the nil entry fee option, in exchange for a higher MER of 2. 35% pa and a 1. 00% exit fee for withdrawals within the first year.
[C]; Standard Contribution Fee is 5. 00% inclusive of GST. Commonwealth Security rebates 100% of the contribution fee when you invest using a PDS obtained from us. All rebates are paid to the investor in form of additional units. A trailing Commission also known as the Ongoing asset based remuneration in the PDS, is rated according to the value of the investments that the investor holds. These rates are 0. 33% per annum for a portfolio value of $0 – $100, 000; 0. 44% p. a. for a portfolio value of $100, 000 to $200, 000; 0. 55% p. a. for a portfolio value of $200, 000 to $400, 000 and 0. 66% p. a. for a portfolio value of $400, 000 and over. All amounts stated are inclusive of GST.
[D]; Standard Contribution Fee is 4. 00% inclusive of GST. Jut like the other three Funds, the Commonwealth Security rebates 100% of the contribution fee when you invest using a PDS obtained from us. All rebates are paid to the investor in form of additional units. The Fund Manager pays a trail commission of 0. 44% pa inclusive of GST from the accumulated fund resources.
Management Expense Ratio (MER) for each fund.
[A] MRE = 1. 51%
[B] MRE = 1. 98%
[C] MRE = 1. 86%
[D] MRE = 2. 10%
From these statistics it is clear that AMP FLI- AMP Equity Fund has the highest Management Expense Ratio while Colonial First State MIF – Balanced Fund has the least.
Measurement of the performance of managed funds.
The performance of managed funds can be tracked using three major ways. This includes monitoring changes in Net Asset Value (NAV), calculation of the total returns on initial capital and finally, figuring out the total yield.
Performance of the Funds over the last 1, 3 and 5 years.
[A]; 1 year: Income = 4. 80%, Growth = -12. 25%, Gross = -7. 46%.
3 years: Income = 7. 39%, Growth = -4. 68%, Gross = 3. 36%.
5 years: Income = 6. 98%, Growth = -1. 32%, Gross = 5. 98%.
[B]; 1 year: Income = 12. 09%, Growth = -25. 18%, Gross = -13. 09%.
3 years: Income = 10. 34%, Growth = -6. 28%, Gross =5. 27%.
5 years: Income = 9. 40%, Growth = 0. 15%, Gross = 9. 15%.
[C]: 1 year: Income = 7. 78%, Growth = -14. 17%, Gross = -6. 39%.
3 years: Income = 6. 90%, Growth = -3. 68%, Gross = 3. 70%.
5 years: Income = 6. 49%, Growth = 0. 05%, Gross = 6. 53%.
[D]: 1 year: Income = 12. 24%, Growth = -30. 33%, Gross = -18. 09%.
3 years: Income = 12. 81%, Growth = -8. 74%, Gross = 6. 14%.
5 years: Income =12. 55%, Growth = 0. 09%, Gross = 12. 61%.
How risk is measured in managed funds.
There are five major factors which can be used to indicate investment risks in a fund which involve the analysis of stocks, mutual, funds and bonds. This includes alpha, r-squared, Sharpe ratio, beta analysis and use of standard deviation. These are statistical measures and are the major components of the Modern Portfolio Theory which is used to assess and predict the performance of equity, amount of fixed incomes and market investments by comparing them to other benchmarks in the market.
Risks involved in investing in the above Funds.
All managed funds carry some risks although the degree of the risks might vary from one fund to the other. Some of the common risks involve;
Profits dilution due to diversification which may lead to loss of monetary value of the initial investments.
The investor looses control over his money since all the management and investing responsibility is left to the fund manager. This comes with the risk that the fund manager may make bad decision leading to huge losses for the investors.
There is also a risk of change in the team work in the funds which may affect the Fund management leading to instability in the fund performance in the stock markets.
Some funds are also quite expensive and there is a possibility of increase in fee charges for the investors with time. For instance, the entry fee for AMP FLI-AMP Equity Fund is quite high as compared to the rest of the studied funds.
An indexed fund refers to a type of mutual fund which has a portfolio structured to match the qualifications of the market index such as the S and P 500 price index, Russell 2000 index among others (Don, 2004). It provides a good market exposure, low portfolio turnover and cheap operating expenses for the investor. It is more or less a passive form of managed fund which concentrates on mutual funds investments. When an investor is choosing whether to invest in an indexed fund or in an actively managed fund, he or she should put several factors into consideration. This includes the level of fees in either funds and the potential risks as well as the expected returns on the capital invested. Indexed funds tend to have lower management fees due to the simplified methods of investment as well as matching rate of returns for the index.
The key issues to consider before investing in a particular managed fund are related amount of fees and taxes imposed by the fund and their overall effects on the capital returns overtime. Before making any long term investment, the investor has to consider the following; the degree of risk associated with that particular fund, fees and expenses, the classes of funds and the securities associated with each class and finally, the amount of taxes imposed and their consequences.
If i had $100, 000 to invest in a managed fund, i would invest the Colonial First State MIF – Balanced Fund. This is because it has the lowest entry price of $ 1.04 and an exit price of $ 1.03. It has no standard contribution fee. In addition, the fund has a low MER of only 1.98% and a minimum investment of $5,000. From the performance history given, the fund has shown a significant growth in capital investments. In fact, the fund is highly rated according to the Morningstar Fund Rating with a five star rating.
Advantages of investing in managed funds.
When one invests in a managed fund, he or she is guaranteed of Professional expertise. Funds are managed by professional who are able to tell the best way in which to invest the resources pooled in the fund. This saves the investor the trouble of having to keep monitoring the market changes to know where to best invest (Archie, 2002).
Investing in managed funds provides more investment opportunities for the investors especially in regions where one is not allowed to access information as an individual or when it is too costly to invest in small scale.
Managed funds come with a lot of diversification advantages for the investor’s money by combining all the resources together to garner higher buying strength in the stock markets.
Lastly, the investor does less paper work since most of the administration and management tasks are done by the fund. Since the costs of administration are shared by many people who have invested in the fund, less costs are reflected on each individual investor.
Disadvantages of investing in a managed fund.
Managed funds can be quite expensive and the more the investment, the higher the costs incurred. In addition, the investor has less control over the asset classes proportions, what to invest and how to invest. All this is controlled by the fund manager on behalf of the investors and it comes with a high risk of bad decisions by the manager which might lead to huge losses for the investors.
Another major disadvantage of investing in managed funds involves the fact that being a mere investment vehicle, the investors are not protected from the fluctuations of share prices in the stock market and any decline in the market share value still affects the investor directly as if it were a direct investment. Moreover, unlike direct investing, there is less flexibility when one invests in managed funds as funds can not be easily switched like in the case of selling shares in the stock market for direct investing. Any changes in funds are accompanied by transfer or exit fees deducted from the investor’s returns.
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Archie, M. (2002). All about Exchange Traded Funds: The Easy Way to Get Started. Boston: McGraw-Hill Publishers.
Don, M. (2004). Managed Futures and Their Role in Investment Portfolio: Institute of Chartered Financial Analysts Research Foundation. New York: Blackwell Publishing.
Funds details. Accessed on 26 Sept, 2008, from: <<https://funds.comsec.com.au/Public/SearchForFunds/SearchForFunds.aspx>>
Perpetual Investment Management Limited (PIML) Analysis. Accessed on 26 Sept, 2008, from <<http://www.perpetual.com.au/global/disclaimer.asp.>>
Sampson, A. (2000). The Money Book: Smart Ways to Manage Your Money and Make It.
New York: Allen & Unwin.