Managed Funds - An Important Role to Play

The use of managed funds can be a useful tool in wealth management strategies.  They can assist in fulfilling the needs of the client.  Some of their attributes include the following:

Flexibility – A major advantage of managed funds is the ability to either add to or to drawdown on one’s investment.  The minimums may be only $100, whereas economic parcels of shares may be closer to $1000 and even then the trading cost may be close to 3% when looking at minimum brokerage fees for the buy/sell process.
Liquidity – many funds can be liquidated or swapped within several days.  Some may have a longer redemption notice period.
Diversification – it is extremely difficult to achieve sufficient diversification within a share portfolio for the average investor.  The minimum marketable parcels of shares and the number of different companies that need to be invested in for prudent diversification is usually beyond the financial reach of most private investors.
Expertise – it is unlikely that many individuals or stock brokers have the expertise and experience that successful fund managers have in running diversified share or bond portfolios. 
Taxation Effectiveness – some managed funds taxation structures have been very tax efficient, so much so that the Government has recently made legislative changes to reduce the taxation advantage.  It is likely that in the future taxation treatments will become similar for most investments irrespective of them being directly or indirectly owned by the investor.

The Managed Funds industry in New Zealand went through a major change in 1998, with the introduction of Aegis, the first major wrap account platform to be available in New Zealand.  This enabled some financial planners the ability to offer retail investors access to wholesale or mezzanine investment services.  The advisers became fee based, with most of the fees being tax deductible for investors.  Advisers no longer received trail fees or entry fees from the various fund managers.  Most importantly for investors, there were significant savings to be made in fund manager fees.

The use of wholesale funds typically reduces fund management fee expenses by around 1%.  This can halve the level of fees paid within the fund, compared to the retail version of the fund.  Actively managed share funds can now have management expenses less than the passively managed listed share funds, plus have no direct costs such as non tax deductible share broking charges for their purchase.

Today, the majority of buyers of retail managed funds which tend to have higher management fees are investors who do not use a fee based adviser, and those buying investments through their banks.  Users of retail managed funds also include investors whose advisers are unable to utilise wholesale arrangements.

For both investors and advisers, choosing the right managed funds or direct shares is very important in being able to meet the investors long term objectives.  Inappropriate selection of investments by advisers and investors, can significantly increase investment risk, and at the same time reduce likely investment returns.