lecture 4

Question 1

 Direct vs Indirect: Managed funds

Answer 1

o MFS are managed investment schemes

o Investors pool money and get an interest in the scheme

Question 2

 Managed fund is characterized by

Answer 2

o	Asset type
o	Style
o	Management structure
o	Tax structure
o	Regulatory structure

Question 3

 Characteristics of managed funds

Answer 3

o Pooling allows
 Lower investment costs, access to expertise, diversification

o Managed fund structure provides access to
 One or all asset classes
 Sub-categories of asset classes
 A particular asset mix

o Managed funds can be listed or unlisted

o Regulated by ASIC and APRA

Question 4

 How to invest in managed funds

Answer 4

o Advantages
 Able to access investments with a small amount of funds
 Wide range of asset classes and investments
 Funds managed by professional manager
 Consolidation of reporting – master trusts / wrap accounts (all information given)

o Drawbacks
 Fees (types and ranges) – entry, exit, switching, management, investment
 Lack of control over investment – timing capital gains
 Lack of transparency?
 Which is the most appropriate fund?

Question 5

 Fees

Answer 5

o Management expense ratio
 Ongoing fee to cover the cost of managing your investment

o Indirect cost ratio
 Ratio of management costs not deducted directly from investors account go average net assets of funds
 New MER

o Entry fee
 Between 1 and 5 and will reduce amount of initial investment

o Contribution fee
 Similar to entry fee, charged on future contributions

o Performance fee
 Paid to fund manager if investment is better than target return

o Withdrawal fee
 Fees charged by fund for each withdrawal

o Termination fee
 Fee charged for closing the account

o Switch fee
 Charged when investors change their asset mix

o Adviser fee
 Commission

Question 6

 Indirect Cost Ratio

Answer 6

o Ratio of management costs which are not deducted directly from investors’ accounts to average net assets of the fund

o Indirect costs that deal with management of fund

o A measure of efficiency

o How effective they are operating / managing the fund

Question 7

 Unlisted managed funds

Answer 7

o Managed fund where you can not sell the entire thing on stock exchange

o Open ended funds which issue and buy back units from investors

o Unit price is a function of NAV

o -NAV = {Fund assets – Fund liabilities} / number of units issued

Question 8

 Limited Management Funds

Answer 8

o Investors buy or sell units or shares on the ASX

o Main types
 Listed investment companies (closed structure)
 Listed investment trusts (closed and open ended units)
 Real estate investment trusts (close ended units)
 Exchange traded funds (open ended units)

• Track and duplicate the performance of a particular market index

Question 9

 Investment structures

Answer 9

o Master trust
 Pools money, access to range of different fund manages
 Record keeping and admin services

o Wrap accounts
 Investments held in name of investor and can be transferred between different providers without CGT
 Benefits
• Investors only deal with 1 org.
• Managed funds accessed at cheaper wholesale MER
• Consolidated reporting of performance, asset allocation, tax

 Drawbacks
• Cost; investors must pay for product / service

Question 10

 Categories: Indexed and non-indexed

Answer 10

o Multi-sector
 Vanguard growth
 Vanguard balanced

o Sector Specific
 Fidelity select IT services Portfolio

o Asset class
 Vanguard high-yield corporate fund

o Sub-asset class
 Vanguard small-cap index fund
 ICI Pru Select Large Cap Fund

Question 11

 Management styles

Answer 11

o Different management styles may be more suited to investor’s risk profiles
o Active
 Regular trading
 Value (focus on income generating potential) and growth (capital growth)
 Very difficult to beat the market
 High frequency trading e.g. fast fibre optic data (resources far greater)
 Focus on market which is unknown to a lot of people due to less efficient and less players

o Passive
 Replicate rather than outperform benchmark or index
 Should be cheapest asset class exposure
 Performance determined by the asset class invested
 Efficient markets hypothesis
• New information released, new information goes into the stock instantaneously
• Financial markets do not allow investors to earn above-average returns without accepting above risks

Question 12

 Best of both worlds, active and passive

Answer 12

o U.S. Large-capital stock (more media attention, coverage and research)

o Build a core and satellite mutual fund portfolio
 Large cap stock index fund represents the largest component of the portfolio
 Rest is made up of other types of funds in smaller portions (e.g. foreign stock, bonds, sector)

Question 13

 Performance

Answer 13

o How do you judge the performance of someone who invests your money?
 What is client’s objective?
 What was the mandate for investing?

o What benchmarks should we be using to judge performance?