Troy Burns Updated Dec 19, 2022
Mate Checked
Before investing in a managed fund with your SMSF, you need to consider a few key questions:
Investing in a managed fund poses many benefits; it is an excellent way for investors to gain exposure to a broad range of markets, assets, investment themes and a lot more. If you are looking for diversification, you have come to the right place.
First, you have to ask yourself – do you want to track the market, or do you want to try and outperform it? Tracking the market costs a lot less than the alternative for apparent reasons, and historical performance shows it is tough to beat the market consistently, especially when you have to contend with the higher fees but timing is the key here.
Active management refers to investment funds that are managed by professionals who try to select the best assets in the market, which they hope will outperform. Individual fund managers have achieved this in the short term but consistently beating the market in the medium to long term has proved difficult over the years, even for the likes of Warren Buffet. You can expect to pay a premium for an actively managed fund due to the additional work that goes into the research and execution of the strategy.
Passive investing seems to suit a wider variety of people because of the difference in fees, sometimes to the tune of around 2% in management fees alone. Passive investing is much more of a more laid-back approach and in recent years has grown significantly in popularity, due mainly to the results it has delivered for investors.
Generally speaking, the most common passive investment is the index tracking fund, which owns a selection of assets that replicate an entire market, like the ASX 200. The index fund’s performance will track the performance of the market very closely. So when you hear that the ASX 200 was up 2% on the day, your index fund would be up by a similar amount, primarily because the fees are so low.
There are two main ways you can invest in managed funds, you can purchase from the investment manager directly or you can buy a listed fund like an ETF or LIC (listed investment company). When you buy directly from the fund manager, like Platinum Asset Management or Perpetual Limited you will typically be buying units in a fund or unit trust. The value of the units or unit price will fluctuate based on the underlying performance of the portfolio and you can buy and sell your holdings from the investment manager.
More commonly, most SMSF investors would buy managed funds from an online broker like Commsec or Interactive Brokers, which have a much broader offering of listed managed funds from many different investment managers.
When purchasing from a fund manager directly, you will typically have to apply to invest in a managed fund. The fund manager might offer different classes of funds and for different types of investors (retail or wholesale investors). Buying from a broker means you have to have a brokerage account with the broker to make the investment. Some examples of brokers in Australia are Interactive Brokers or Commsec. The process of buying the managed fund is the same as buying any other listed company or share on the ASX.
The fees are higher in an actively managed fund because there is more work involved. To put it in plain terms, a managed fund with a 2% management fee will cost you $200 for every $10,000 you invest. Most investment managers are upfront with these fees but it’s worth taking the time to understand any additional costs the manager charges they can impact your investment returns over time.
There can also be transaction fees for buying or selling a fund directly from a fund manager, opposed to a broker who charges a commission for the trade. The transaction cost for buying from a fund manager often comes in the form of a buy/sell spread which is essentially the cost difference between the buy/sell price of the fund.
When you have decided which fund or funds you want to invest in, you might want to consider how you are going to stay on top of your investment. One way of keeping your portfolio in check is to rebalance every year. This means if one segment of your portfolio has experienced some gains, it now constitutes a more significant percentage of the portfolio than the previous. Often investors will choose to sell down a portion of the assets which have appreciated in value to bring down the overall exposure to that segment or asset class.
