Week 4 Flashcards
Indirect investment
Indirect investment involves investing through Managed Investment Schemes (MIS)
A MIS fund is a type of financial service that receives money from its investors and then invests that money on their behalf in a diversified portfolio of various assets
MIS allow the investor to choose asset allocations to achieve objectives whilst maintaining their desired levels of risk
What is Asset Allocation?
Is the process of determining the mix of investments in a portfolio among different asset classes having in mind the investment outlook and the risk / return objectives of the investor:
objective is to find an allocation which is appropriate for the investor and aims to provide the most efficient portfolio.
asset allocations range from conservative through to aggressive
financial planner has to devise a strategy based on needs and objectives of client (know your client and products)
Understanding the clients Financial Concerns- Part of Risk Profile Questionnaire
Time Horizon Tax Benefits Accessibility Diversification Estate Planning Capital growth Liquidity Stability/Capital security Investment Income Investment Risk Insurance
Risk Profile Options
Defensive Risk Adverse 100% income Conservative 20% growth, 80% income Moderate 40% growth, 60% income Balanced 60% growth, 40% income Growth 80% growth, 20% income High Growth/ Aggressive 100% growth, 0% income
Strategic approach to asset allocation
focuses on long term performance objectives to establish asset mix
portfolio will need to be amended from time to time to bring portfolio back to original mix
Tactical approach to asset allocation
changes the asset mix based on predictions of how the investor expects the market to perform
asset switching occurs in an attempt to outperform the market
The managed fund industry is made up of:
Superannuation funds Unlisted managed funds Unit trusts Exchange Traded Funds (ETF) friendly society and life insurance bonds allocated pensions
Whose involved in Managed Funds
Financial Institutions: Insurance Companies, Banks, Boutiques etc.
Work as the responsible entity for managed funds
Investment Managers/Portfolio Managers
Chooses assets to be included in fund
Investment Analyst /Investment Strategist
Researches information about assets for the manager
Economist
Researchers local and global economic trends
Business Development Managers
Creates financial products to meet investors needs
Financial Planners
Recommends funds to clients
Internet companies- Morningstar, DirectInvest
Review performance of funds and fees
Regulation of Managed Funds in Australia
Three pillars of financial services regulation
ASIC
APRA
RBA
ASIC
Monitors managed fund industry
Ensures compliance with legislation
Regularly issues policy statements outlining changes and areas of concern
APRA
Supervises banking and financing industry (Prudential regulation)
RBA
Monetary policy, systemic stability and payment systems regulations
Industry bodies impacting on managed investment markets are:
Financial Services Council (FSC) -ASX - SFE
Characteristics of Managed Funds
A managed fund is characterised by the: Type of asset the fund invests in Management structure Regulatory structure required for its operation Managed funds provide investors with a pooled investment structure with: Decreased costs Decreased risks Increased returns
MANAGED INVESTMENT SCHEME
The Management structure of Managed funds in Australia
A single Responsibility Entity (RE) (a public company holding an AFSL)
Constitution and compliance plan
Product disclosure statements (PDS) (Risk, Cost, Return) and Prospectus
Unit holders (investors)
Conduct independent audits
TRUST
The Management structure of Managed funds in Australia
The trust deed
The trust manager
The trustees
The Operations of a Managed Investment Scheme
Investor completes application form in prospectus and submits with cash.
monies are collected into marketable parcel for investing in the listed assets.
Certificate issued to investor and a statement of fees.
Income earned on fund released to unit holders periodically.
Change in value of the assets reflected in changes in the unit price.
Using Managed Funds as an Investment Strategy
Managed funds provide investors with a greater choice of assets than direct investing.
Using managed funds helps investors build a diversified portfolio of investments.
Broadening out of risk-return frontier
Wider range of assets for Asset Liability Management purposes
Shortfall risk more evenly balanced
Take advantage of the benefits of international investment
Benefits of Diversification
Diversification across managers
Diversification across sectors
Diversification across countries
Diversification across managers
Value based or growth based approach to investing
Passive / index-linked portfolio management scheme
Specific sectors only
Tactical asset allocation approach
Diversification across sector
Exposure to cycle of returns for different asset classes with less capital
Diversification across countries
Can reduce risk and enhance returns on portfolios
Types of Managed Investment: Asset classes
SLIDE 28
Types of Managed funds: Unlisted managed funds
A managed fund is a type of financial services that receives money from its investors and then invests that money on their behalf in a diversified portfolio of various assets.
It is unlisted, not on stock exchange.
Involves pooling money with many other investors.
Managed investment funds have been available to investors in Australia for a long time.
Types of Managed funds: Insurance Bonds
Life insurance policies backed by investments within a life office statutory fund.
Special Taxation Provisions,10 year rule & Tax Paid
Insurance Contract- Use of PDS
Do not pay income or dividends to investors. Income retained within bond and used for further investment
Joint ownership, Transfer & Beneficiaries
125 % additional contribution rules
Early Redemption rule & 30% Rebate of growth
Before 9th year > Total growth @ Investors MTR*
In 9th Year > Two Thirds assessed as income*
In 10th Year > One Third assessed as income*
> 10 years > Growth is Tax Free to the investor
*less a tax offset of 30%
Types of managed funds: listed funds
Funds which are available on ASX:
Listed investment companies (LICs):
Listed investment trusts (LITs)
Real estate investment trust (REITs)
Exchange traded Funds (ETFs)
Listed investment companies (LICs):
You buy shares in a company which invests.
Can pays franked dividends.
Closed fund, so management does not accept more money coming in or out.
Listed investment trusts (LITs)
You buy units in the trust in closed end unit trust.
Similar to a LIC but is a trust, franking dividends depends on type of income earned.
Must pay all distributions to unit holders.
Real estate investment trust (REITs)
Gives investors access to property assets which normally need large amounts of money e.g. industrial property etc
Operates as a unit trust
Exchange traded Funds (ETFs)
Relatively new and many kinds assets
Fund follows a passive strategy sometimes called an index strategy. E.g. a share market index (ASX200)
Other types of Managed Funds
Investment Type Regular Investment Superannuation Account based Pension Geographical Location Asia, US, UK, Japan, Europe, Global Product Type Retail, Wholesale, Industry and Corporate
Selecting a Managed Investment Scheme for Personal Investing: Factors
Asset allocation
Performance
Fees
Risk
Reporting
Accessing the funds in the scheme
Real returns
The management expense ratio (MER)
Asset allocation
Is sector or asset class suited to risk tolerance?
Performance
Returns to investors in the past? Any significant personnel changes? Media coverage? Comparison with industry average? Comparison with direct investment in asset class?
Fees
Entry/ contribution fees (0- 5%) and exit/ withdrawal fees (0 - 4%)
Ongoing management fees [0.15% (p.a.) to 2.11% (p.a.) depending on the fund
Switching fees (entry fee option/Nil entry option- higher exit and ongoing fee)
Adviser Service fees such as trailing fees (fees the adviser will receive as remuneration), usually between 0.10% and 0.45%
Risk
Registered with ASIC?
Types of securities allowed to invest in?
Valuation of securities?
Prospectus clear on risk associated with each asset?
Reporting
MIS must report regularly to ASIC and scheme members
Accessing the funds in the scheme
Open-ended vs. closed-ended
Exit fees
Real returns
Rate higher than inflation
The management expense ratio (MER)
Ratio of fees charged to the value of the assets under management
Usually between 0.5% and 3%
Trading Units in a Managed Investment Scheme In Australia
Direct investment into fund via prospectus or product disclosure statement
Via ASX for listed trusts or schemes
Direct investment into fund via prospectus or product disclosure statement
The Responsibly Entity (RE) will buy and sell units daily
Price based on current net market value of assets of fund
Via ASX for listed trusts or schemes
Price determined by supply and demand for units in fund
Value of assets of fund (Net Asset Value)
Unit Prices
Investors buy units in the trust or MIS.
Units are segments of ownership of the fund.
A unit price is known as Net Asset Value
where
NAV =
(Fund assets – Fund liabilities)
divided by
Number of units issued
Asset Allocation Of The Managed Fund Industry In Australia
Steps in asset allocation:
1. Funds are collected and pooled.
2. MIS allocates funds to asset classes
Growth of funds under management varies according to:
the inflow of funds, and
the value of the assets invested
Fund managers set up funds to match profile of investor they are targeting.
Management Styles
Differentiating between the way the funds are managed can help investors match their personal risk profile to that of the fund.
Two main investment styles:
Active Management: portfolio construction based on qualitative and quantitative research and aims to outperform benchmark of market indices
Passive Management: strategy is to replicate the chosen index or create an index-like performance using options and futures
Active Management
Portfolio is based on qualitative and/or quantitative research (fundamental and technical analysis)
Aims to outperform the benchmark index
Stock selection and market timing of buy/sell decisions most important
Success dependent on market and stock selection and timing
Passive( Strategic) Management
Portfolio is based on chosen index
Asset Allocation based on Benchmark Portfolio
Strategy is to copy the index or create index like performance using options and futures
Popular with pension fund trustees
Effective control of fund risk, using the indexed funds
Master Trusts
Simplify administration of managed funds by investing while also providing a vehicle for diversification across fund managers.
An investment vehicle that enables individual investors or superannuation funds to channel money into one or more underlying investments—most commonly wholesale pooled funds operated by professional investment managers.
Master trusts usually allow access to a selection of fund managers and investment markets while consolidating investments into the one fund.
Master trusts and Wrap Accounts
Master trusts:
Investments are held by a trusteein its name, on behalf of the investor. All fees and some taxes are bundled into the unit pricefor each investment and allocated to the investor
Wrap accounts:
They are operated by a trustee but the investor holds the underlying assets in their own name.Can include existing investments held in MIS, Provide administration of those investments.Results in a more personalised asset allocation.
Taxation Issues For Investors In Managed Funds
Complex area for the potential investor.
Capital gains concerns.
ATO position
Investors should pay the same tax rate on managed fund investments as they would on direct investments.
Superannuation funds have different tax regimes.
Measuring returns from a change in unit price
r =
(sale price or current market value - purchase price)
divided by
purchase price
result multiplied by 100
Measuring Returns From Managed Funds Investing continued
slides 51 - 2
Why Managed funds? Problems of Direct Investment in a diversified portfolio
Time: A substantial amount of time is required to monitor the performance of a diversified portfolio
Large financial resources required: Sufficient diversification cannot be achieved without at least $100,000 in 12 - 15 stocks
Expertise: Understanding market condition, picking shares and evaluating performance
Access to vital information: This refers to market information such as economic data, statistics, comments by leading economic research houses
Business connections: Some important information can only be obtained through strong business ties, especially in overseas markets
Summary: Advantages of Managed Funds Investments
Pooling funds to gain access to wider options
Professional management by qualified and experienced personnel
Access to specialised sectors
Access to capital-intensive investments
Simplification of the administrative processes
Enhanced ability to diversify
Administration by others
Regulatory oversight and monitoring by ASIC and APRA
Ease of redemption
Fees known up-front
Assessment of funds by rating companies
Direct payment of dividends or income
Disadvantages
Decisions made by someone else Fees Level of risk taken by fund manager Personnel changes may affect returns Capital gains tax
The Future Of The Managed Fund Industry In Australia
The managed fund industry has been the subject of a number of legislative changes, brought about by the government’s need to encourage people to save for their own retirements and to ensure funds are available when needed. Demographic ageing (and decline of extended family) brings retirement income security to the fore Pay-as-you-go systems’ vulnerability during ageing
