Managed Investment Funds in Australia - Coursework Example

Finance Assignment College: Name: Students ID: Date: Course Name: Unit Code: Time: Instructor: Executive Summary Managed funds is a way to pool funds to invest across investment options. The funds can be invested across different styles (e.g. value, growth, balanced, small-medium capitalisation, large-capitalisation (blue-chip), market neutral) and different sectors (e.g. resources, health, biotech, retail, REITs, infrastructure). This paper presents an analysis of three different managed funds investment in Australian equities. The funds suit the client with a reasonably long-term focus and has enough tolerance for risk to invest in any class of equities, but would prefer not to invest in geared (leveraged) equities. They are suitable for a high net-worth individual. The client wants you to suggest a fund that invests in prominently in Australian equities. The analysed funds are actively managed. The first option is the Colonial First State - Principal Property Securities (FSF0665AU), which targets investments in Australian property (listed/unlisted). The second fund is the BT Active Balanced Fund (RFA0020AU), which targets investments in diversified/multi-sector portfolio. The third fund is the Challenger/Alphinity wholesale Australian share (PAM0001AU), which targets investments in Australian stocks listed on the ASX and is diversified across different industries and sectors. The recommended fund is the Colonial First State - Principal Property Securities (FSF0665AU). Property investment in australia is likely to grow, particularly in the suburbs with 10 per cent or more each year in the coming five years as opposed to a growth of between 5.82 and 7.92 per cent in equity investment. Introduction Managed funds are monies pooled from different investors and then spread across various investment options. There are a lot of different managed funds, it is therefore imperative to have clear knowledge of the inherent differences so as to settle on the investment fund that meets your needs. In this paper, we look at three managed investment funds in Australia. The funds considered suit a client with a reasonably long-term focus and has enough tolerance for risk. All funds discussed in this paper are actively managed. Fund 1: The first managed fund is the Colonial First State - Principal Property Securities (FSF0665AU). Just as the name suggests, the fund targets investments in Australian Property (Listed and/or Unlisted) (Comparefunds.com, 2014a). The fund is mainly targeted towards investments in Australian Property (Listed and/or Unlisted). The fund is generally aimed at both capital depreciation and income distribution (Comparefunds.com, 2014a). The objective of the fund is to outperform the benchmark (S&P/ASX300 Property Accumulation Index) by 1.5 per cent per year over a rolling three year period before deducting fees, tax and other expenses. It also aims to create a well-diversified range of property that offers both growth as well as a steady income (Comparefunds.com, 2014a). The fund does not target any specific investors. As at 30 September 2014, the fund allocated the invested capital in three asset classes; Australian shares (1.3 per cent), cash (2.9 per cent), and listed property (95.8 per cent). The investors are allowed a 14-day ‘cooling-off period’. The 14 days apply as the earlier of; (1) when the transaction confirmation of the investment is received; or 5 days after the units are issued (Investsmart.com.au, 2014a). The fund has significant attributes that encourage investors to put their money there. The fund offers a triple benefit of unique value (dais for a modest price), service (fast and personalised service), and choice (diversity) (Investsmart.com.au, 2014a). The lowest initial investment is $5000. There is no minimum additional investment. For a Regular investment plan the minimum investment is $500 per month (Investsmart.com.au, 2014a). As at 31th August 2014, the size of the fund was $4.24 million (Investsmart.com.au, 2014a). The average total performance of the fund over the past 5 accounting periods is 10.8 per cent with a maximum of 18.3 per cent and a minimum of 0.3 per cent (Investsmart.com.au, 2014a). Table 1.1: Fund’s Historical Performance 2010-11 to 2014-15 Year Growth (%) Income (%) Total (%) 2014-15 0.3 0.6 0.9 2013-14 8.5 3.1 11.6 2012-13 18.3 4.4 22.7 2011-12 6.0 5.6 11.6 2010-11 1.9 5.1 7.0 Average 7.0 3.8 10.8 Source: Comparefunds.com (2014a) There are various fees and costs that apply to this fund. The fees and costs may be subtracted from the investor’s money (returns) or from the total fund asset. The standard entry fee is 4 per cent. There are no fees charged when money moves in or out of the fund, that is, no establishment fee, contribution fee, withdrawal fee, or exit fee is charged. A fee of 1.09 per cent is charged on the total average net asset value of the fund, plus the estimated performance fees (if applicable) for management costs. The transaction cost is 0.20 per cent of the transaction value per transaction. Other costs include the abnormal costs, operating expenses, buy/sell spreads, and adviser service fees. These fees can vary from time to time (Investsmart.com.au, 2014a). The responsible entity for the fund is Colonial First State Group. This is one of the leading financial service providers in Australia. The group has an investment team with the requisite expertise, having been in operation as of 1988 (Investsmart.com.au, 2014a). The fund is reported through other media outlets. For instance, Morningstar’s current rating of the fund is 3/5 stars (as at 31 May 2012). Comparefunds.com also reports some information regarding the fund, including historical performance, and profile. Fund 2: The second managed fund is the BT Active Balanced Fund (RFA0020AU). Just as the name suggests, the fund targets investments in diversified/multi-sector portfolio (Comparefunds.com, 2014b). The fund is mainly targeted towards investments in different styles, thus the name balanced/blended/diversified sector. The fund is generally aimed at both capital depreciation and income distribution (Comparefunds.com, 2014b). The objective of the fund is to provide its investors with returns (before fees and taxes) that outperform the benchmark over the recommended timespan (Comparefunds.com, 2014b). The fund does not target any specific investors. As at 30 September 2014, the fund allocated the invested capital in seven asset classes; Australian shares (35.3 per cent), international shares (20.6 per cent), cash (1.7 per cent), listed property (7.2 per cent), Australian fixed interest (16.7 per cent), international fixed interest (10.1 per cent), and others (8.4 per cent). Retail investors (as defined by the Corporations Act 2001) who invest directly enjoy cooling-off rights. The cooling-off rights are exercisable within 14 days from the earlier of; when the confirmation of the investment is received; or the close of the 15th business day following on which the units were issued. However, indirect investors, wholesale clients, and illiquid investment options do not enjoy cooling-off rights (Investsmart.com.au, 2014a). The fund has significant attributes that encourage investors to put their money there. One, the fund is diversified, with over 40 investment options across different asset classes. Two, the fund offers flexibility given the changing investment environment such that investors adapt quickly to the investment strategy and can switch among different investment options (Investsmart.com.au, 2014b). The lowest initial investment is $5000, when a Regular Investment Plan is established, the minimum initial investment is $2000. There is no minimum additional investment, no minimum switch amount and no minimum withdrawal amount (Investsmart.com.au, 2014b). As at 31th August 2014, the size of the fund was $24.2 million (Investsmart.com.au, 2014b). The average total performance of the fund over the past 5 accounting periods is 9.2 per cent with a maximum of 17.0 per cent and a minimum of -12.5 per cent (Investsmart.com.au, 2014b). Table 2.1: Fund’s Historical Performance 2005-06 to 2009-10 Year Growth (%) Income (%) Total (%) 2009-10 14.3 1.0 15.3 2008-09 -25.5 12.5 13.0 2007-08 -22.7 10.2 -12.5 2006-07 0.5 13.1 13.6 2005-06 10.7 6.3 17.0 Average -4.5 8.6 9.2 Source: Comparefunds.com (2014b) There are various fees and costs that apply to this fund. The fees and costs may be subtracted from the investor’s money (returns) or from the total fund asset. There are no fees charged when money moves in or out of the fund, that is, no establishment fee, contribution fee, withdrawal fee, or termination fee is charged. A fee of 1.03 per cent is charged on the total average net asset value of the fund for management costs. The issuer fee is between 0.77 – 2.77 per cent per year, expense recoveries 0.00 – 0.66 per cent per year, and performance fee 0.00 – 1.00 per cent per year. Other costs include advice fees, negotiation fees, incidental costs, and among others (Investsmart.com.au, 2014b). The responsible entity for the fund is BT Funds Management. The firm has been in operation ever since 1969, they have sufficient expertise in wealth management. Given that this is a diversified investment, different managers may be required (Investsmart.com.au, 2014b). The fund is reported through other media outlets. For instance, Morningstar’s current rating of the fund is 3/5 stars (as at 30 September 2013). Morningstar also gives it a gold recommendation. Comparefunds.com also reports some information regarding the fund, including historical performance, and profile. Fund 3: The third managed fund is the Challenger/Alphinity wholesale Australian share (PAM0001AU). Just as the name suggests, the fund targets investments in Australian stocks listed on the ASX and is diversified across different industries and sectors (Comparefunds.com, 2014c). The fund is mainly targeted towards investments in the Australian general equities large blend sector. The fund is generally aimed at both capital depreciation and income distribution (Comparefunds.com, 2014c). The objective of the fund is to outperform the benchmark (S&P / ASX 300 Accumulation Fund) after costs over rolling five-year periods (Comparefunds.com, 2014c). The fund targets individual investors, joint investors, sole traders, super funds, trusts, Australian companies along with other investors who intend to invest for more than five years, on the lookout for high levels of yield and are at ease with high risks, comprising the probable negative returns in certain periods. BHP Billiton is the leading equity investor with 9.89 per cent (Investsmart.com.au, 2014c). As at 30 September 2014, the fund allocated the invested capital in two asset classes; Australian shares (97.9 per cent) and cash (2.1 per cent). The investors can withdraw their monies at any time, but, this is done under certain requirements. The bare minimum withdrawal amount is $1000. Retail investors (as defined by the Corporations Act 2001) enjoy cooling-off rights. The cooling-off rights are exercisable within 14 days from the earlier of; when the confirmation of the investment is received; or the close of the 15th business day following on which the units were issued or sold. However, indirect investors do not enjoy cooling-off rights (Investsmart.com.au, 2014c). The fund has significant attributes that encourage investors to put their money there. One, the fund is diversified. Money is usually invested in between 35 to 55 Australian stocks listed in the ASX, a feat individual investors cannot achieve on their own. Two, the investment process is unique, clear and rigorous. Detailed basic bottom-up inquiry and selective quantitative inputs are used to identify companies that possibly will earn more or less than the current market expectations. The fund manager lays emphasis on ‘buy’ and ‘sell’ decisions with the contemplation that market earnings expectations will in the end drift in the direction of the manager’s expectations (Investsmart.com.au, 2014c). The lowest initial investment is $10000, when a Regular Savings Plan is established, the minimum initial investment is $1000. The minimum additional one-off investment amount per month is $1000 and $100 for the Regular Savings Plan. The fund manager is at liberty to vary or relinquish the minimum investment at any time (Investsmart.com.au, 2014c). As at 29th August 2014, the size of the fund was $124.77 million (Investsmart.com.au, 2014c). The average total performance of the fund over the past 5 accounting periods is 8.4 per cent with a maximum of 21.4 per cent and a minimum of -9.3 per cent (Investsmart.com.au, 2014c). Table 3.1: Fund’s Historical Performance 2010-11 to 2014-15 Year Growth (%) Income (%) Total (%) 2014-15 -3.0 0 -3.0 2013-14 14.6 0 14.6 2012-13 21.4 0 21.4 2011-12 -9.3 0 -9.3 2010-11 5.8 0 5.8 Average 5.9 0 5.9 Source: Comparefunds.com (2014c) There are various fees and costs that apply to this fund. The fees and costs may be subtracted from the investor’s money (returns) or from the total fund asset. The standard entry fee is 4 per cent. There are no fees charged when money moves in or out of the fund, that is, no establishment fee, contribution fee, withdrawal fee, or termination fee is charged. A fee of 0.90 per cent is charged on the net asset value of the fund for management costs. There is also a buy/sell fee of +0.30/-0.30 per cent. These fees can vary from time to time (Investsmart.com.au, 2014c). The responsible entity for the fund is Fidante Partners. They issue the fund units and are held accountable, legally, by the funds’ unit holders for its operation. They have appointed Alphinity as the investment managers of the fund. Fidante Partners have a related entity that owns a part of Alphinity’s equity stake. Alphinity combines fundamental analysis and quantitative inputs to identify companies undervalued companies that are about to rake in big earnings so as to outperform the benchmark. Alphinity has an investment team that has worked together for over seven years, they have apposite expertise (Investsmart.com.au, 2014c). The fund is reported through other media outlets. For instance, Morningstar’s current rating of the fund is 4/5 stars (as at 31 December 2013). Morningstar also gives it a bronze recommendation. Comparefunds.com also reports some information regarding the fund, including historical performance, and profile. Discussion and Recommendation: The proposed objective of the investment option is to provide a return (before fees and taxes) that exceeds the return from its benchmark when measured over a rolling three-year period. This is because the client has a long-term focus. The proposed investment option strategy is to invest in property securities, both listed property and unlisted. The client mainly wants investment based in Australia, therefore, the investment option invests principally in Australian properties. Up to 80 per cent of the investment option can be invested in domestic listed property whereas 15 per cent of the investment option may also be invested in unlisted property investments. Property securities in Australia are expected to deliver good returns going to the future (Moneysmart.gov.au, 2014). Property investment is preferred because returns, especially capital growth, rise within a short span of time. For instance, there are periods when property in Sydney and Melbourne have doubled in value in a short span of time. Onthehouse.com.au (2014), projects that property in the suburbs will grow with over 10 per cent or more each year for the coming 5 years. On the other hand, equity is likely to grow but at a lower rate of between 5.82 – 7.92 per cent. Considering the investment options discussed above, shares/equities have been known to offer the paramount returns, over the longer term. However, they are the most volatile (risky) seeing as their worth may well be influenced by the expected earnings and profits, industry trends and general market conditions. On the other hand, property securities investments are have been known to be not as much of volatile (risky) than shares/equities but deliver potentially higher returns. Property securities are also subject to market conditions and are impacted by general economic conditions and occurrences that affect the overall share market. The balanced/blended/diversified investment options also deliver good returns given that they are diversified and easy to manage across a range of assets. They too are subject to market conditions and are impacted by general economic conditions and occurrences that affect the overall share market. Our recommendation is: Colonial First State - Principal Property Securities (FSF0665AU). References Comparefunds.com, (2014a), Colonial First State - Principal Property Securities (FSF0665AU), viewed 13 October 2014, . Comparefunds.com, (2014b), BT Active Balanced Fund (RFA0020AU), viewed 13 October 2014, . Comparefunds.com, (2014c), Challenger wholesale Australian share (PAM0001AU), viewed 13 October 2014, . Investsmart.com.au, (2014a), Colonial First State - Principal Property Securities (FSF0665AU), viewed 14 October 2014, . Investsmart.com.au, (2014b), BT Active Balanced Fund (RFA0020AU), viewed 14 October 2014, . Investsmart.com.au, (2014c), Alphinity wholesale Australian share (PAM0001AU), viewed 15 October 2014, . Moneysmart.gov.au, (2014), Choosing a Managed Fund, viewed 16 October 2014, Read More