Why Managed Funds Are One of Your Best
Investment Options
What Is A Managed
Investment Fund and What are its Advantages?
Managed funds are collective investments
where a number of investors pool their money so that it can be managed by investment
professionals.
Most people realise that in order to
achieve financial security and independence in the future they have to put money aside on
a regular basis.
They know, too, that having worked hard
for that money, it makes a great deal of sense to ensure that it works equally as hard for
them.
And that's where investment comes in,
because there is a fundamental difference between saving and investing.
Saving, on the one hand, is the simple act
of squirrelling money away for some future purpose.
Investment, however, is using that same
money in such a way that it actually makes more money. In other words, making it work for
you so that it provides you with an increase in capital, or an income, or both.
Here in New Zealand, one of the best ways
to ensure that your money works really hard is to put it into a managed investment fund.
There are several significant advantages
which you'll enjoy with a managed investment fund
- You gain access to potentially high return investments
which would not otherwise easily be available to you as a direct investor - international
investments for example, or investment in multi-million dollar projects or property.
- Your money is managed to minimise risk given the returns
that you seek
- You gain the opportunity for higher returns over the long
term
- Your money is managed by experienced professionals who are
fully aware of investment trends and opportunities so that returns are maximised and risks
are minimised.
- You can choose a fund which matches your attitude to risk
and your requirement for capital growth, on-going income, or both.
How to select an investment fund
which is right for you
Your final choice of investment will be
determined by a number of factors.
The most important are that the type of
investment is designed to meet your specific requirements and that you are comfortable
with both the prospective returns and the risk which is involved.
Your requirements
It is a good idea to be quite clear in
your mind what it is you require from your investment, before you start.
Is preserving your capital most important,
or is the provision of an income uppermost in your mind? Are you prepared to risk some
spare cash in the hope of significant returns? Are you looking for capital growth rather
than an income producing investment? Do you want both income and capital growth?
Your attitude to risk and return
You should be comfortable with the level
of risk associated with the investment you choose. Investments can go down as well as up.
It is no good investing in a particular fund only to lose sleep if its unit price should
fall back or not rise as quickly as you had anticipated.
Likewise, choosing a fund with a
conservative focus might result in returns you find disappointing, if your original
investment purpose was more speculative or entrepreneurial.
Your time scale
Most managed investments should be seen as
medium to long term commitments.
It is a good idea to ensure that the
investment you make is effective over your own time scale.
Assessing the quality of management
In a managed investment, you're putting
your money into someone else's hands so it is wise to ask questions about the manager's
depth and breadth of investment skills.
How long have they been in business, what
company affiliations do they have? Do they have a good reputation? Are they members of the
Investment Savings and Insurance Association? If so, they will be bound by the
Association's Practice Standards.
Checking their track record
While past performance is no guarantee for
the future, it does give some indication of expertise and ability, provided nothing has
changed in the meantime.
Most fund managers will be able to provide
you with statistics relating to the historical performance of their funds.
Checking the investment portfolio
What will your money be specifically
invested in? Is your prospective fund's investment portfolio available for inspection?
Finding out about fees
All fund managers' prospectuses and
Investment Statements must clearly state what service, management and other fees are
charged on the fund.
Other useful information
The Securities Act 1978 (as amended) and
the Securities Amendment Regulations 1997 set out the information which must be provided
to you before you sign up for a managed fund.
You must be given an Investment Statement
with answers to the following questions:
What sort of investment is this?
Who is involved in providing it for me?
How much do I pay?
What are the charges?
What returns will I get?
What are my risks?
Can the investment be altered?
How do I cash in my investment?
Who do I contact with enquiries about my
investment?
Is there anyone to whom I can complain if I
have problems with the investment?
What other information can I obtain about
this investment?
You also might find it useful to know such
details as:
- how often the fund's assets are valued - daily, weekly or a
longer interval
- whether the manager has the right to borrow on security of
the fund's assets and if so, do they exercise that right, and what percentage of assets is
involved
- whether the fund manager is permitted to invest in futures
or options for the purpose of hedging and/or speculation
- whether the fund hedges against exchange rate fluctuations
if it invests offshore
- if the fund distributes income, whether this can be
reinvested in the fund to buy additional units, and if so, what charges may be incurred
What are the Different Sorts of
Managed Fund?
There are several types of managed funds
you can choose to invest in. They include Unit Trusts, Group Investment Funds, Insurance
Bonds, Superannuation Funds and Investment Companies.
Unit Trusts
Unit trusts
are one of the world's fastest growing and most popular investment types, and are a
variety of managed fund where investors' funds are pooled. The individual investor buys
"units" in the trust, the price of which is determined at the time the investor
buys into it.
Most unit trusts
are not listed on the stock exchange; instead units are bought and sold through the fund
manager.
For those trusts
which are listed on the stock exchange, the buying and selling of units is based on the
price which buyer and seller agree. This may differ from the asset backing of the trust.
| Unit Trusts at a Glance |
| What asset classes are invested in? |
Cash, fixed interest mortgages, property, equities, specialist assets,
diversified funds |
| Are specialist Trusts Available? |
Yes |
| Do I have access to overseas investments? |
Yes |
| Are Balanced Trusts Available? |
Yes |
| Are Savings Locked in for a Set Period? |
Not usually |
| Are unit trusts registered and approved? |
Yes, by the Justice Department, under the
Unit Trusts Act 1960. |
| Must the Trustee be Independent of the Fund Manager? |
Yes |
| Are a Registered Prospectus and an Investment Statement Required by Law? |
Yes |
Types of unit trust
In New Zealand there are about thirty fund
managers who offer a multiplicity of different unit trusts. In addition, you also have
access to a number of overseas-based managers.
Trusts may focus on one particular asset
or asset class, country or region , or may be diversified over different assets, asset
classes, countries or regions.
There are also trusts which widely
diversify their investments. Some may concentrate on protecting their unit holders'
capital; others on providing them with regular income, or on delivering capital growth, or
on a combination of both.
How unit holders' rights are safeguarded
Unit trusts are regulated by law, and must
be approved and registered by the Ministry of Commerce before they can be promoted to the
public.
A unit trust is based on a trust deed - an
agreement between the independent trustee and the fund managers - which sets out the rules
by which the trust must operate.
The independent trustee is responsible for
the safe custody of the trust's assets; ensuring that the trust is managed according to
the rules set out in the trust deed; and ensuring that all assets are correctly registered
in the name of the trustee or its nominee company. These responsibilities allow the
trustee to oversee the trust's operations so that unit holders' interests are safeguarded.
As a further safeguard, an independent
auditor audits the trust's accounts annually and a report is sent to all unit holders as
well as being filed with the district Registrar of Companies.
The manager of the trust, who is
responsible for day-to-day operations, must be independent of the trustee, and post a bond
with the government securing the discharge of its obligations under the Unit Trusts Act.
In addition, certain information
prescribed by law must be supplied to the prospective investor before an application to
buy units is actioned. This information is provided in what is known as a registered
prospectus.
Trusts which are managed offshore are not
subject to the Unit Trusts Act 1960, but are governed by the Securities Act 1978.
Many Australian unit trusts are exempt
from registering a separate prospectus as required by New Zealand law, and can use their
Australian prospectus since the two countries' requirements are very similar.
Group Investment Funds
Group investment funds (GIFs) are very
similar to unit trusts. The significant difference is that the trustee and the manager are
the one and the same.
The trustee/manager must be one of a
limited number of statutory Trustee Corporations established in New Zealand.
Types of Group Investment Fund
The conservative and risk averse nature of
many Trustee Corporation clients has meant that group investment funds have traditionally
been biased towards fixed interest securities and investments secured by mortgages, rather
than equities or other investments which offer higher potential returns with a higher
level of risk. However, GIFs are now offering an increasing range of asset classes.
| Group Investment Funds at a Glance |
What asset classes are invested in? |
Traditionally focused on cash, fixed interest and mortgages, but
increasingly offering property and equities. |
Are specialist Funds Available? |
Yes |
Do I have access to overseas investments?
|
Yes |
Are Balanced Funds Available?
|
Yes |
Are Savings Locked in for a Set Period?
|
Not
usually |
Are Group Investment Funds Controlled by legislation?
|
Yes, under the provisions of the Trustee Companies Act 1967. |
Must the Trustee be Independent of the Fund Manager? |
No, but has to be one of a limited number of statutory Trustee
Corporations. |
Are a Registered Prospectus and an Investment Statement Required by Law? |
Yes, must satisfy the provisions of the Securities Act |
Generally, GIFs focus on providing
both capital growth and income to their investors.
How investors' rights are safeguarded
GIFs are formed under the provisions of
the Trustee Companies Act 1967. Legislation requires the trustee/manager to invest with
the care, diligence and skill that a prudent person would exercise in the management of
the affairs of others.
Insurance Bonds
Insurance Bonds are single premium life
insurance policies which provide the policy holder with access to a pooled investment
fund.
They offer limited life cover in the form
of a death benefit which results in the estate of the unit holder typically receiving at
least the total amount invested.
Types of Insurance Bonds
A number of different types of insurance
bonds are available.
One of the most popular is a bond which
gives investors the assurance that the unit price will not fall. Such bonds are usually
titled "capital stable". They are designed for investors who are very risk
averse and almost always concentrate on assets such as cash or fixed interest securities.
Insurance Bonds at a Glance |
What asset classes are invested in? |
Traditionally focused on cash, fixed interest and mortgages, but
increasingly offering property and equities. |
Are specialist Funds Available? |
Yes |
Do I have access to overseas investments? |
Yes |
Are Balanced Funds Available? |
Yes |
Are Savings Locked in for a Set Period? |
Not
usually |
Are Insurance Funds Controlled by legislation? |
Yes, under the provisions of the Life Insurance Act 1908, and the
Securities Act 1978 |
Is a Trustee Required? |
No. |
Are a Registered Prospectus and an Investment Statement Required by Law? |
Yes |
Other |
Offers
limited life insurance cover |
Income earned by a fund is added to the
policy value rather than distributed to bond holders. This means that they are suitable
for investors who seek capital growth rather than those who require income.
As with unit trusts, a broad range of
asset types is available to the investor - from cash and fixed interest funds to higher
risk equity investments.
How bond holders' rights are safeguarded
Insurance bonds are subject to a stringent
code of practice on how they operate, and investors' rights are further protected by
specific provisions of the Life Insurance Act 1908, and the Securities Act 1978.
Most insurance bonds offer investors a
"free look" period. This means that they can change their mind during this
period and cancel the bond without incurring any financial penalty.
Superannuation Schemes
Superannuation schemes, like unit trusts,
are also a popular form of managed investment fund in New Zealand.
This is largely the result of the
realisation that taxpayer-funded superannuation is unlikely to provide more than the
barest essentials in the future, and that individuals must make provision for their own
retirement income.
Types of superannuation scheme
While any form of saving for retirement
could be termed a "superannuation scheme" the schemes described here are trusts
registered under the Superannuation Schemes Act 1989.
A scheme may be set up for a group such as
employees in a work place or, more commonly, people may simply join a retail scheme
offered to the public by a fund manager.
How Investors' rights are safeguarded
The Superannuation Schemes Act 1989
requires extensive reporting, and gives wide-ranging powers to the Government Actuary to
safeguard the interests of investors.
Superannuation Schemes at a Glance |
What asset classes are invested in? |
Traditionally focused on cash, fixed interest and mortgages, but
increasingly offering property and equities. |
Are specialist Funds Available? |
Yes |
Do I have access to overseas investments? |
Yes |
Are Balanced Funds Available? |
Yes |
Are Savings Locked in for a Set Period? |
Sometimes
- depending on the trust deed |
Are Superannuation Schemes Controlled by Legislation? |
Yes, under the provisions of Superannuation Schemes Act 1989. Government
Actuary has wide powers to safeguard investors' interests. |
Must the Trustee Be Independent of the Fund Manager? |
No |
Are a Registered Prospectus and Investment Statement Required by Law? |
Yes,
except in very limited circumstances. |
Other |
"Free
Look" period may be available. |
Superannuation schemes are required to
have a trustee, who must be approved by the Government Actuary.
As with the insurance bonds, some
superannuation schemes offer investors a "free look" period where they can
reconsider their decision without financial penalty.
Risks Versus Returns and the
Influence of Market Forces
You will often hear people say that
investments which promise the highest returns may also carry the highest risk and, for the
most part, this is true.
Conversely, those investments which are
considered to be the least risky, may also produce the smallest returns.
This doesn't just happen in isolation.
Various types of investments follow different cycles which are driven by international and
domestic market forces, and other factors such as the rate of inflation.
This has the effect of making some
investments riskier in the short term, or making the returns from more conservative
investments less attractive in the long term.
What this means is that at any given time
there are a wide variety of factors influencing the worth of a particular investment,
which is why successful investors put their funds not only into a spread of different
investment types but also across a variety of markets in different countries.
The result? Their investment portfolio
contains a good spread of investments. In other words, the inherent risk of a particular
type of investment is offset against the lower risk of another - the old adage of never
putting all your eggs in the one basket is particularly appropriate when it comes to
investment.
When share values, for example, might be
falling, fixed interest securities might be rising. The markets in Europe could be
sluggish while Japan or the US is moving ahead. Oil and gas shares can boom at the same
time as commodities slump.
It's obvious then that it requires skill,
experience and quite a lot of time to directly invest in, and successfully develop a
balanced portfolio, but that's no reason why ordinary New Zealanders can't gain access to
the rewards enjoyed by the professional investor, since managed funds give them that
opportunity.
What types of Assets do managed
funds invest in?
There are many different types of assets
which managed funds invest in. The fund may specialise in just one type of asset, or it
may diversify its investments over a range of assets.
The most common asset classes invested in
are:
Asset Classes at a Glance |
Type |
Return |
Risk |
Duration
|
Cash |
Low |
Low |
Short Term |
Fixed
Interest |
Moderate |
Med |
Med Term |
Mortgage |
Moderate |
Low |
Med Term |
Property |
Moderate |
Mod |
Long Term |
Equities |
High |
High |
Long Term |
These risk return indicators are based on a long term (15-20 year)
investment cycle, but market conditions can sometimes cause short term variations. |
Cash
Investing in cash means investing in
on-call accounts, term deposits and 90 day bills, and some funds, usually called cash
management funds - specialise in this asset class.
Cash management funds offer an alternative
to money market and call deposits with a bank, building society or finance company. They
enable small amounts of money to be pooled to attract higher interest rates and provide
you with a convenient means of saving for shorter term goals.
Cash Management Funds are very low risk and
usually accept smaller sums than other types of funds.
Fixed interest securities
Fixed interest securities comprise
government, local body or corporate bonds. The borrower issues the bonds to the lender at
a fixed rate of interest over the term of the investment.
Fixed interest funds do not offer the
investor a fixed rate of return as such, since the capital value of the investment will
vary as interest rates move up or down.
Fixed interest funds in New Zealand offer
the opportunity to invest in either local and offshore securities, or both, or in
securities with shorter or longer term maturities.
Mortgages
Mortgages are similar in effect to fixed
interest securities, the difference being that they are secured over property rather than
the credit worthiness of the issuing organisation.
A wide range of mortgage funds is
available. They may invest in first or second mortgages, secured over residential,
commercial, industrial or rural property and be of varying duration.
Mortgage funds are considered to have a
very low risk, and a number may carry some form of capital guarantee.
Equities or shares
An equity is a "share" in a
company listed on a stock exchange. Essentially buying a company's shares means that the
investor shares in the success, or failure, of that particular company.
Equity funds invest in these shares.
Equity funds available in New Zealand give
you access not only to the local sharemarket, but to virtually every sharemarket in the
world. There are also global or international funds which spread their investments across
a selection of the world's markets.
In addition to funds focusing on a
particular country or region, some equity funds also have a specific purpose; they might,
for example, invest in stocks of a particular type such as emerging markets, or in
resource-based shares.
There are many factors which affect the
returns of equity funds. They include the individual performances of the shares of the
companies which make up the fund, as well as wider domestic and international economic
influences. For this reason, investment in equity funds should be considered a medium to
long term commitment.
Property
Property is real estate, physical ground,
with or without buildings on it.
Property fund managers generally seek to
invest in good quality commercial, retail or industrial properties which have solid,
dependable tenants on secure long term leases, or in listed property securities.
In New Zealand you can choose from
property funds which specialise in certain types of property - retail or industrial, for
example; on a particular region; or on a combination of both.
The returns from a property fund are
influenced by changes in the underlying value of the property or properties invested in
and the rentals derived from them. These factors in turn are affected by wider influences
such as supply and demand and the general economic environment.
Highly Specialised assets
Investment funds specialising in such
highly specialised areas as bloodstock breeding, film or other entertainment projects,
fine art, futures trading and tourism are increasingly available, particularly overseas.
These types of funds are often attractive
to people with a specific interest in the asset being invested in.
Balanced funds
Balanced funds are probably the most
common form of managed investment fund. They offer investors access to the specialist
asset classes described above, the proportions of which are determined by the fund's
objectives.
Their primary benefit is that they offer
you the opportunity to have a diversified portfolio which can maximise your returns and
minimise potential risk - all in the one fund.
The risk/return profile of a particular
balanced fund depends on the proportion of the various asset classes which make up the
fund. For long term investors, funds which are weighted towards cash or fixed interest
generally have smaller returns and less risk than those which have a higher exposure to
equities or property, which offer higher potential rewards with an increased level of
risk.
Getting Professional Financial
Advice
It is always reassuring to gain
professional advice if you're not sure about your investment intentions. You could seek
advice from an investment advisor, a financial planner, or direct from a fund manager.
Keeping Track of Your Investments
Keeping a regular eye on how your fund is
performing is usually easy.
Unit prices for most New Zealand funds are
published regularly in the financial or business pages of the main centre newspapers. In
addition, fund managers often advertise their prices on a regular basis, as well as
sending reports on a quarterly or half yearly basis to their unit holders.
You can also telephone your fund manager
or financial adviser or planner to get the latest prices.
You should be aware that most investment
funds are designed to produce optimum returns over the medium to long term and you should
not be unduly influenced by the day-to-day fluctuations in unit prices.
Once a year fund managers are obliged to
produce an audited annual statement of account for each fund, and a copy of this is sent
to each unit holder.
To calculate the value of your investment,
provided there are no exit fees involved, simply multiply the number of units you hold by
the exit or selling price.
