The first managed fund was created in the US in 1934 (known then as a 'Mutual Fund') but only since the mid-80s has the decline of government funded Superannuation pushed them to become a major player in the New Zealand investment market. With individuals now having to save more money for their retirement, the availability and security of the managed fund has given the common investor a viable alternative to put away for their future.
What is a Managed Fund?
A managed fund is a collective investment, where a group of investors pool their money in order to invest into a wider range of bonds, equities and other securities. Funds are offered, and managed, by a professional fund manager who will make the decisions on which securities to buy and sell, and when. Depending on the type of managed fund, any capital gains made on trades will either be reinvested into the fund, paid out to the investors in the form of a distribution, or a split between the two.
Managed Fund Types
Not all investors are created equal, however, and so the need arose for a variety of managed funds to cater for different tastes, risk profiles and investment needs. The underlying operational nature of the fund also contributes to its 'type'. In New Zealand, there are three 'types' of managed fund that dominate the market.
1. The Superannuation Fund
Arguably the most common in New Zealand is a Superannuation Fund. As the name suggests, these funds are tailored towards clients who are specifically investing for retirement. The funds available often contain a conservative mix of investments being high in cash, fixed interest and "blue chip" equities. Other superannuation specific options include the option of locking in your funds to a specific date or age, 100% re-investment of capital gains and some even offer the guarantee that the fund value will never fall - although that is only on the most conservative of funds.
2. Unit Trusts
Unit Trusts are the main rival of the Superannuation Fund for the title of New Zealand's most popular, and also can lay claim to being one of the fastest growing investment types in the world. These are less restricted than Superannuation funds, in that they are not solely instruments for retirement planning, and hence often comprise of a more dynamic set of investments, and many frequently pay out distributions. They are, however, governed by a Trust Deed, which is a formal document that sets out the rules by which the Trust must operate. The Trust Deed is supervised by the trustee of the fund, who must be independent from the fund manager and is there to ensure that the clients' best interests are looked after.
To invest in a Unit Trust, clients must buy "units" or parts of units in the fund. The price of a unit is calculated on a regular basis (usually daily), by dividing the total value of all investments within the fund, by the total number of units held by investors. It is not unheard of for a Unit Trust to retain a unit price of $1.00 while distributing all capital gains to investors, providing them with an income stream, but forfeiting investment growth.
3. Group Investment Funds (GIFs)
GIFs are the last on the list of big players in the market. GIFs are very similar to Unit Trusts in their functionality, with the main difference being that their trustee and fund manager are one and the same. Historically, GIFs have been more conservative, but the Trustee Amendment Act has relaxed this behaviour and the range of available options is now increasing.
So why are managed funds increasing in popularity?
Well, there are significant advantages an investor obtains by participating in a managed fund. For example;
- The fund is managed by a professional. Their job, and their livelihood depend on the success of the fund, so they will pay careful attention to the markets, keep up to date with all the latest news and essentially do all the ground work so the investor doesn't have to.
- Diversification of investments. Possibly the biggest issue individual investors face is how to adequately diversify their investments to secure against unforeseen market events. By investing in a managed fund, the increased pool of money allows a wider variety of securities to be purchased, subsequently adequate diversification can be achieved.
- Bulk purchasing. Another advantage of having a larger pool of money is buying in bulk. By buying more shares at once, the fund manager can often negotiate a cheaper rate, hence reducing the cost of investing.
- Multiple investment solutions. Finally, with such a wide range of managed funds available, there is now a potential solution for almost every investor, regardless of how much they want to invest, where they want it invested and what kind of risks they are willing to take to do so.
Unfortunately, managed funds aren't perfect and there are some disadvantages that the client should be aware of. Obviously investing in a managed fund is not free, and the fund manager will take a small cut, but when weighing this cost against the gains from bulk purchasing and from having a professional manage the investments this charge is usually fair and reasonable. There may also be a man in the middle who buys your units for you, and he will also take a small percentage. However, there are places where you can buy funds directly, cutting out the middleman.
The key disadvantage is tax, as all managed funds' capital gains and distributions are currently taxed at 33%. This means that your capital gain on your investment is only realised after the tax is paid on the fund. However, the government is currently fine-tuning new investment capital gain tax laws which should see some positive changes.
While managed funds are not for everyone, they have very powerful benefits. As their popularity continues to rise these benefits are only going to become more influential. Anyone who is looking to invest, but doesn't want the hassle and uncertainly of doing all the work themselves, should definitely think about using one of the hundreds of managed funds that are available in the market today.
Visit New to Managed Funds to learn more about investing in funds with RaboPlus.