Topic 4- Managed Funds Flashcards
What are managed funds
- A managed fund is a type of financial services organisation that _________ money from its investors (known as unit-holders) and then ________ those funds on their behalf in a diversified portfolio of securities (or other assets)
- An investment in a managed fund __________ an ownership position in a professionally managed investment portfolio
- Benefits of managed funds:
- __________ in a managed fund ________ for diversification
- a managed fund _______ access to a portfolio of securities and other assets which are professionally managed
- most managed fund investments can be ______ with a modest capital outlay
What are managed funds
- A managed fund is a type of financial services organisation that receives money from its investors (known as unit-holders) and then invests those funds on their behalf in a diversified portfolio of securities (or other assets)
- An investment in a managed fund represents an ownership position in a professionally managed investment portfolio
- Benefits of managed funds:
- investing in a managed fund allows for diversification
- a managed fund offers access to a portfolio of securities and other assets which are professionally managed
- most managed fund investments can be started with a modest capital outlay
Regulating managed funds
- Managed funds in Australia are required to ______ under an Australian Financial Services Licence (AFSL) _______ by the Australian Securities and Investments Commission (ASIC)
- _______ is the regulator of managed funds
- Funds must ________ and _______ a Product Disclosure Statement (PDS) to potential investors
- In Australia, a managed fund must _______ a “Responsible Entity” (RE) which ______- as a trustee and manager of the fund
+ all aspects of the fund trust, including ___________, _________ of investment managers and __________ of fund assets, are the ___________ of the RE
+ the RE must be a _______of an AFSL
Regulating managed funds
- Managed funds in Australia are required to work under an Australian Financial Services Licence (AFSL) issued by the Australian Securities and Investments Commission (ASIC)
- ASIC is the regulator of managed funds
- Funds must issue and provide a Product Disclosure Statement (PDS) to potential investors
- In Australia, a managed fund must appoint a “Responsible Entity” (RE) which acts as a trustee and manager of the fund
+ all aspects of the fund trust, including administration, appointment of investment managers and custody of fund assets, are the responsibility of the RE
+ the RE must be a holder of an AFSL
Unlisted managed funds
- Unlisted funds are funds that _____ units directly to investors and _________ those units according to the Net Asset Value (NAV) whenever investors (unit holders) wish to ______ them
- Unit holders ________ payments as __________ (dividends, interest, rental income and other income earned on the holdings of the fund), and _____________ (sales of securities or other assets) in accordance to the number of units they hold
- unit holders may also _______ capital gains or _______ when they sell their units
- unit holders are responsible for ________ their tax liabilities in respect of the distributions and capital gains
Unlisted managed funds
- Unlisted funds are funds that sell units directly to investors and repurchase those units according to the Net Asset Value (NAV) whenever investors (unit holders) wish to sell them
- Unit holders receive payments as income distributions (dividends, interest, rental income and other income earned on the holdings of the fund), and capital gains distributions (sales of securities or other assets) in accordance to the number of units they hold
- unit holders may also incur capital gains or losses when they sell their units
- unit holders are responsible for meeting their tax liabilities in respect of the distributions and capital gains
Listed funds
A listed fund is a type of managed fund in which investors ______ and ______ units in the _______ market (similar to buying / selling securities on the _______)
Please note: in Australia, most listed funds are Real Estate Investment Trusts (REIT) which manage a property portfolio such as industrial, office, retail, hotels and leisure and aged care, as well as diversified holdings across all property types.
Listed funds
A listed fund is a type of managed fund in which investors buy and sell units in the open market (similar to buying / selling securities on the ASX)
Please note: in Australia, most listed funds are Real Estate Investment Trusts (REIT) which manage a property portfolio such as industrial, office, retail, hotels and leisure and aged care, as well as diversified holdings across all property types.
Net Asset Value
- The Net Asset Value (NAV) is the underlying value of the unit in a particular ___________ – ______ or ________
- The NAV is calculated to ______ the price that units are bought and sold at and it is calculated at least _______ a day
Net Asset Value
- The Net Asset Value (NAV) is the underlying value of the unit in a particular managed fund – listed or unlisted
- The NAV is calculated to derive the price that units are bought and sold at and it is calculated at least once a day
Calculate holding period return for these two investments
A year ago, an investor bought 400 units of a managed fund at $9.50 per unit; over the past year, the fund has made an income distribution of 70 cents per unit and had a capital gains distribution of 85 cents per unit. Find the investor’s holding period return, given that this fund now has a net asset value of $11.10.
A year ago, YZ Fund was trading at $77, when its NAV was $71. Today the fund is quoted at a price of $84, while its NAV stands at $89.99. If the fund paid $1.04 to shareholders over the past year, what is the holding period return (based on share price) on YZ Fund?
Fees and other costs
- _____ and ________ fees
- ______\_and ______\_ spread
- ______commission
- _______\_ expense ratio (MER)
- _______commission
Fees and other costs
- Entry and exit fees
- Buy and sell spread
- Up-front commission
- Management expense ratio (MER)
- Trail commission
Trail commission (TC) is paid by investment management companies to financial advisers, and is generally around 0.1% to 0.9% p.a. of the value invested by a client. If an investment is made directly through a financial adviser, TC is generally kept by the adviser.
When investors make investments in or withdrawals from a Fund, the Fund may need to buy or sell assets. Such transactions incur costs such as brokerage and government taxes, and differ between different asset types and in different countries. A buy (or sell) spread is our estimate of the costs associated with the purchase (or sale) of Fund assets in connection with the purchase or withdrawal of units.
The expense ratio is a measure of what it costs an investment company to operate a mutual fund. An expense ratio is determined through an annual calculation, where a fund’s operating expenses are divided by the average dollar value of its assets under management (AUM)
Categories of managed funds
- Growth funds _________ capital gains
- Aggressive growth funds are highly _________ investment vehicles that ________ large profits from _________
- Equity-income funds ________ on ___________ by investing primarily in ____________ shares
- Large Cap, Mid and Small Cap funds
- Multi-Sector and Balanced funds tend to ______ a balanced portfolio of both shares and bonds for the purpose of _________ a well-balanced return of both ________ and ______ capital gains
- Fixed-interest funds ________ exclusively in various types and grades of _______
- Cash management trusts (CMTs) ______ and _______ short-term money market instruments e.g. bank certificates of deposit
Categories of managed funds
- Growth funds aim for capital gains
- Aggressive growth funds are highly speculative investment vehicles that seek large profits from capital gains
- Equity-income funds emphasise on current income by investing primarily in high-yielding shares
- Large Cap, Mid and Small Cap funds
- Multi-Sector and Balanced funds tend to hold a balanced portfolio of both shares and bonds for the purpose of generating a well-balanced return of both current income and long-term capital gains
- Fixed-interest funds invest exclusively in various types and grades of bonds
- Cash management trusts (CMTs) buy and sell short-term money market instruments e.g. bank certificates of deposit
Categories of managed funds - continued
- Index funds ______ and _______ portfolios of _______ (or ______) equivalent to those in a ______ index (e.g.: ASX/S&P 200)
- Exchange-traded funds (ETF) ______ shares or _________ portfolios whose composition ________ that of a specific index – their units are bought and sold on stock markets
- Sector-Specific funds ________its investments to a ________ sector, or segment, of the market
- Ethical or Socially responsible funds ________ only certain companies which _______\_ the fund’s moral, ethical or environmental ________
- International funds _______in _______ markets
- Global and Region-Specific funds
Categories of managed funds - continued
- Index funds buy and hold portfolios of shares (or bonds) equivalent to those in a market index (e.g.: ASX/S&P 200)
- Exchange-traded funds (ETF) hold shares or commodities portfolios whose composition mirrors that of a specific index – their units are bought and sold on stock markets
- Sector-Specific funds restrict its investments to a particular sector, or segment, of the market
- Ethical or Socially responsible funds consider only certain companies which meet the fund’s moral, ethical or environmental tests
- International funds invest in foreign markets
- Global and Region-Specific funds
Services offered to investors
- Automatic reinvestment plan – distributions are used to _______ additional units in the fund (_________ still applies)
- Regular withdrawal plan is a ___________\_ amount of money received by an investor every month or quarter (subject to _______________)
- Conversion privileges and switching _________ investors to ______\_ from one fund to another within one investment management company (subject to ______________)
- Wrap Account is an investment platform which _______ an investor to _______ in a _______ range of managed funds (including wholesale managed funds), listed securities and even term deposits
-> the wrap provider ____________ a single consolidated report on performance, manages dividends and income distributions and generates data for ___________.
Services offered to investors
- Automatic reinvestment plan – distributions are used to buy additional units in the fund (tax liability still applies)
- Regular withdrawal plan is a predetermined amount of money received by an investor every month or quarter (subject to minimum investment requirements)
- Conversion privileges and switching enables investors to move from one fund to another within one investment management company (subject to Capital Gains Tax)
- Wrap Account is an investment platform which allows an investor to invest in a large range of managed funds (including wholesale managed funds), listed securities and even term deposits
-> the wrap provider generates a single consolidated report on performance, manages dividends and income distributions and generates data for t_ax purposes_
Sharpe’s measure
- A measure of portfolio/fund performance that _______ the risk premium per unit of _________risk, which is measured by______________ of return
- The _______ the value of Sharpe’s measure, the better
- the higher the risk premium per unit of total risk
- it is meaningful when compared to either _________ or to ________
Sharpe’s measure
- A measure of portfolio/fund performance that gives the risk premium per unit of total risk, which is measured by the portfolio’s standard deviation of return
- The higher the value of Sharpe’s measure, the better
- the higher the risk premium per unit of total risk
- it is meaningful when compared to either other portfolios or to t_he market_
Sharpe’s measure – the formula
Treynor’s measure
- A measure of portfolio/fund performance that gives the risk premium per unit of _____________ risk, which is measured by ___________
- The _______the value of Treynor’s measure, the better
- the _______ the risk premium per unit of non-diversifiable risk
- it is meaningful when compared to either other portfolios/funds or to the market
- It ________ the portfolio has been built in a manner that diversifies away all diversifiable risk
Treynor’s measure
- A measure of portfolio/fund performance that gives the risk premium per unit of non-diversifiable risk, which is measured by the portfolio’s beta
- The higher the value of Treynor’s measure, the better
- the higher the risk premium per unit of non-diversifiable risk
- it is meaningful when compared to either other portfolios/funds or to the market
- It assumes the portfolio has been built in a manner that diversifies away all diversifiable risk
Treynor’s measure – the formula
Jensen’s measure
- A measure of portfolio/fund performance that ________the portfolio’s beta and CAPM (non-diversifiable risk measures) to _______ its excess return, which may be positive, zero or negative
- The ________ the value of Jensen’s measure (also known as Jensen’s Alpha), the _______the performance of a fund
- positive values indicate the portfolio/fund ________ a return in excess of its risk-adjusted, market-adjusted required return
- negative values indicate the portfolio/fund ________ to earn its required return
- value of zero indicates the portfolio/fund ______ exactly its required return
Jensen’s measure
- A measure of portfolio/fund performance that uses the __________ and ________ (non-diversifiable risk measures) to calculate its excess return, which may be positive, zero or negative
- The higher the value of Jensen’s measure (also known as Jensen’s Alpha), the better the performance of a fund
- positive values indicate the portfolio/fund earned a return in excess of its risk-adjusted, market-adjusted required return
- negative values indicate the portfolio/fund failed to earn its required return
- value of zero indicates the portfolio/fund earned exactly its required return
