- There are four main types of managed funds: retail managed funds, exchange traded funds, listed investment companies and model portfolios.
- Superannuation managed funds are managed funds investors use for their superannuation.
- Regardless of what types of assets are held in a managed fund, they all have to follow the same rules and laws.
The different types of managed funds are based on how they are organised, what they invest in or how investors access them.
When you start researching managed funds you will come across terms such as retail managed funds, exchange traded funds, listed investment companies and model portfolios. Some are also categorised by whether or not they can accept superannuation contributions or by what they invest in. This chapter explains each of these categories.
Retail managed funds
These are managed funds available through mainstream investment managers, such as those associated with financial planning groups, banks, life insurance companies or other wealth management groups. In retail managed funds you buy units in the fund directly from the fund's responsible entity or through an intermediary that they have an association with, such as a financial adviser or stockbroker. Retail managed funds may also be referred to as public unit trusts or mutual funds.
Exchange traded funds
These are managed funds available on the Australian Securities Exchange (ASX). However, while units in exchange traded funds (ETF) are bought or sold through the ASX or other exchanges such as Cboe Australia, they are not listed on the exchange like a normal company share. Instead, you use the exchange's transaction system to buy or sell ETF units. There are two main types of ETFs: indexed ones and actively managed ones.
Indexed ETFs track a particular market index. For example, an ETF may track the Australian sharemarket index, the United States sharemarket index or the Australian government bond market index. An actively managed ETF is one where the investment manager tries to beat the market index and, unlike regular managed funds, it's available through the ASX and Cboe Australia.
When you buy units in these ETFs, even though you are using the exchange to make your transaction, the price of the units is determined by the price of the index tracked by the ETF, not by how much demand or supply there is for that particular ETF.
ETFs managed this way have very low fees because their investment manager only has to follow or mimic their market index. ETFs that are managed to beat a market index may be known as
exchange traded managed funds (ETMF). There are a growing number of products that can be transacted both on an exchange or at a price determined by the manager based on its Net Asset Value when the exchange has closed for the day. These are called hybrid securities.
Listed investment companies
Listed investment companies (LIC) are a type of investment fund that is incorporated as a company listed on the ASX. Investors buy or sell shares in the company, just as they would buy or sell any other company shares.
Like regular managed funds, LICs have an investment manager who is responsible for selecting and managing the company's investments. LICs do not need a responsible entity as the company board is responsible for how it is managed and administered.LIC shares are traded on the ASX like regular company shares, which can result in the value of the LIC's share price reflecting not just the value of its underlying investments but how popular the LIC is.
For example, a LIC may have very valuable investments in its portfolio- that is, have a high net tangible asset (NTA) value - but other investors might not trust the LIC's investment managers to perform in future, so the LIC's share price may be lower than its NTA. This is what market analysts mean when they say a LIC is "trading at a discount".
Model portfolios
Model portfolios are similar to regular retail managed funds. The difference is that in a retail managed fund, the investor buys units in the fund and investment decisions are made collectively by the investment manager on behalf of all the fund's investors. In a model portfolio, the investor owns or has "beneficial ownership" of the underlying investments.
Model portfolios may be designed around an investment theme, such as a particular segment of the sharemarket, for example, shares in large Australian or international companies or global real estate investment trusts (G- REITs). In a model portfolio the investment manager may assemble a portfolio that includes not just directly held company shares but also units in other managed funds like retail unit trusts, ETFs or LICs.
This more complex and flexible ownership arrangement means that the administrative systems used for model portfolios are much more sophisticated than those used by retail managed funds. These advanced administration systems are known as managed account platforms.
Superannuation managed funds
Superannuation managed funds are funds that hold superannuation savings, that is, retirement savings that attract concessional rates of taxation. The only difference between normal managed funds and superannuation managed funds is the rate of taxation that applies to investment deposits or investment earnings. There is no difference in the fund's investments, the role of the investment manager or what is expected of the responsible entity.
Asset classes and managed funds
An asset class is a group of common assets that have similar characteristics, for example, Australian shares, international commercial property or Australian government bonds. Sometimes people describe managed funds according to the asset classes they invest into, such as an Australian shares managed fund or a cash managed fund.
Managed funds have to follow the same rules and laws irrespective of what asset classes make up the assets owned by the fund. This means there is no difference between managed funds that hold investments in different asset classes, so it is a mistake to think these are different types of managed funds.
