Prime Value
02/Sep/2009
ARE MANAGED FUNDS DEAD?
Fiona Clark
Prime Value
1 September 2009
While I never like to say never, I doubt very much that the managed funds industry needs to start making funeral arrangements any time soon.
Managed funds are not for everyone, but they have a number of very significant advantages for the average investor.
Firstly, managed funds offer professional management. An investor doesn’t have to do their own research, such as keeping abreast of current economic conditions, industry trends or the current valuation of a hedge book, for example. The investor pays a small fee to have experts do all the work for them. If they select a manager with an investment philosophy and approach they admire, then the investor can put some trust in the “stewardship” role that the manager should play.
Using a managed fund is an easy way to diversify an investment portfolio. Holding 5 or 10 stocks in a portfolio could mean some return risk (ie high volatility of returns), but when purchasing managed funds, there are generally more securities. Some may be good performers and some may not but generally there will be lower volatility of returns.
In addition, the administrative burden of investing is greatly simplified when investing via a managed fund. Quick and easy transactions, less paperwork, consolidated tax statements, transaction history for capital gains tax calculations. For anyone experienced with share investing, these become significant advantages for a time-poor investor.
Flexibility is also enhanced with a managed fund. Want to reduce your exposure to large cap companies and move toward small-caps? Sell one managed fund and purchase another (maybe even offered by the same manager). Think global shares are positioned for strong performance? Simple.
The managed fund industry is now quite mature and offers not only this flexibility but also great variety. An investor can obtain an exposure to a much wider range of investment opportunities – opportunities they could not obtain by themselves. Whatever your investment inclination (property, fixed interest, small cap, large cap, all cap, global or domestic) there will be something to suit most preferences.
Managed funds are not perfect and there are some disadvantages inherent in their structure. These are generally related to transparency, accumulation of unrealised capital gains (which is not always relevant, particularly in a bear market) and lack of investor control (such as avoiding a particular stock or sector for environmental or social reasons). But when you take account of the benefits of diversification, administrative simplicity, flexibility, variety and professional management, the investment case is very strong.
So after a year of quite sickly performance, I would think the managed fund ”patient” is showing improved vital signs and is set for a full recovery.