How to find the best managed fund in Australia

Thinking about managed funds? Here's what most people get wrong - plus how to choose a fund that actually matches your goals.

Crafting an investment portfolio requires a bit of legwork. There are goals, risk appetite levels and investment timeframes to consider.

Then it's time to build the portfolio. For some, that will mean rolling up their sleeves, doing the research, buying individual shares and adding to their portfolio piece by piece.

What is a managed fund?

However, that approach won't be for everyone. For investors who are happy to outsource some of that research and decision making to a professional, managed funds come into their own.

"A managed fund is an investment structure - an investment vehicle - where funds from multiple investors are pulled together and invested into a portfolio of assets managed by a professional fund manager," says Shannon Freney, a financial adviser at Direct Wealth.

"So a fund manager will take that money and they will use it to invest in a basket of assets - normally in exchange for a fee - to generate a return for investors."

What types of managed funds can Australians buy?

Like individual stocks, there's no shortage of managed funds for investors to choose from. As Jonas Daly, chief of distribution and marketing at Bennelong Funds Management, notes, one way 
that funds differ is the asset classes they focus on.

"Typically, for Australian investors, funds with a focus on Australian shares are popular. But you also have global equity funds, which are a diversified portfolio of companies from countries around the world, mainly developed countries, but there are funds that cover emerging markets as well.

"Then outside of equities, you've got the ability to invest into bond funds, credit funds, property funds as well as infrastructure funds."

Active vs passive: what's the difference?

Beyond the underlying assets that make up funds, one of the big differentiators between them is whether they are actively or passively managed.

In an actively managed fund, a fund manager will research and select assets in order to meet a stated performance objective. For an equities fund, that may be beating the returns of a particular index (for example, the ASX 300) over a set period (for example, 12 months).

Passive funds are less hands-on. For instance, an index fund will aim to mirror an index (for example, the FTSE 100) by holding shares of companies in that index, usually based on 
their market capitalisation, to replicate the performance of that index.

Because of the different approaches, passive funds tend to have lower fees, although Daly argues that there are other benefits to an actively managed fund.

"With an active approach, the fund manager is actively going through the market looking for the best opportunities. That could be based on a certain theme, like AI or data, or looking more broadly for good-quality businesses with strong fundamentals.

"So, on the risk-management side, they're trying to avoid businesses that potentially could have headwinds. Whereas if you buy the index, you're getting all the stocks in the index - you don't have the ability to throw out the bad ones."

How do fund managers pick stocks and set strategy?

In the same way that no two investors will have the same approach to portfolio construction, Daly says that fund managers also have their unique styles.

"We have a growth-style fund manager here, Bennelong Australian Equity Partners, which is focused on quality and growth.

These are businesses with strong balance sheets, sales numbers and growth numbers, so the final portfolios include underlying stocks based on those fundamentals.

"Other managers are value-styled and tend to look for bargains in the market that will grow in time. Then there are groups that like to be style-neutral. They might go into growth and value, and they tend to pick the portfolio they think is best rather than having a regimented stock-picking process.

"You've also got smart beta strategies that try to provide beta to the market, but they still try to have a rules-based approach. And there's an equal-weighted strategy, where the portfolio is equally weighted across different sectors."

While these different approaches may just seem like interesting snippets of information, Daly says they can be important for investors to appreciate and investigate.

"A diversified portfolio should have a mix of different styles. So, if growth is underperforming, then value could potentially be performing better.

"If there's a report written on the fund from a research house like Morningstar, then the style of the fund manager, what their process is and what they're trying to achieve will usually be commented on."

Why choose managed funds?

When explaining the benefits of managed funds to clients, Freney says that one point he tends to stress is the opportunity they provide for investors to tap into professional expertise.

"You can outsource that management to someone with a specialised level of knowledge in a specific asset class - people who specialise in growth stocks, property investments or particular bonds."

Then there's the matter of diversification. Not only can managed funds provide exposure to different sectors and geographies that investors might find harder to obtain when purchasing individual stocks, they can offer access to assets that regular investors simply can't purchase.

"Opening up the menu for individuals with investments that aren't listed on the ASX or that may be closed to people who don't meet the wholesale investment criteria - that's huge," says Freney.

"Take something like infrastructure. You wouldn't be able to go and invest in Sydney Airport yourself, but your super fund or your managed fund can, allowing you to actually get a bite of it."

Given the range of managed funds on the market, Freney says that - depending on an investor's goals and risk tolerance - they can be used in different ways within someone's portfolio.

"You may be able to access a fund offering a very broad investment menu, which could make up the core of a portfolio. But you also have funds looking to capitalise on areas of the market that may not be suitable for that - something more specialised that could work as a satellite in your portfolio."

How to compare managed funds

With thousands of funds to choose from, finding the right option will require a dive into the details. For Freney, a good place to start is getting to grips with what the fund is trying to achieve.

"You don't necessarily have to understand the investment and stock-selection process - it's more about understanding what performance benchmark the fund is looking to achieve. Consumers can get a lot of that information in documents such as a target market determination [which outlines who a product may be suitable for based on needs, objectives and financial situation].

"On top of that, it's worth asking if the fund fits within your personal risk framework. Is it too much risk? Is it too little risk? Where does it sit with your other investments?"

Freney says that this is where a financial adviser can help, but for those who are looking to invest in a fund themselves, there are a few other things worth considering.

What fees will you pay?

"The next step would be the fees. Is there a performance fee? A flat fee? Is the fee based on the amount that you're investing? Then after that, I would consider how it is structured for tax purposes," he says.

"Finally, work out how you can access it. Is the fund even available to individual investors? Can you purchase units in your own name? Does it have to be purchased through a platform?

"There's a few levels to it, which is why I'd always recommend seeking professional advice, just to make sure that your portfolio remains in line with your needs."

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