Set Problem Week 8 Solutions
1. What are the attractions and drawbacks of managed investment schemes?
Attractions of managed investment schemes
a. Diversification (across asset classes {Balanced Fund} or within asset classes
{Diversified Share Fund) / specialised (focussed on a single asset class {Global Share
Fund} or within asset classes {European Share Fund}), or somewhere in between
(investor can select based on their unique needs and objectives)
b. Full-time professional management
c. Modest investment outlays ($1,000, $100 per month)
d. Paperwork for tax purposes provided by fund manager (fees are structured to
compensate the fund manager for these services)
e. Easy of entry for small investors (Mum & Dad investors not only for the wealthy
or privileged)
Drawbacks of managed investment schemes
a.
b.
c.
d.
e.
High transaction costs (relative cost as asset based fees e.g. 0.80 % of assets ongoing)
Management fees every year (regardless of performance of the investment)
Same risk as direct investment in the same types of assets
Arguably not as interesting as direct investment.
No control over investment activities (fund manager makes decisions no individual
control over realisation of gains / losses for example)
2. What factors do you think you would need in order to be able to properly assess a
funds performance?
Important information in examining a funds investment performance, include:
how the fund has performed in the past
the type of returns the fund has generated in good and bad markets
the level and timing of income and capital gains distributions
the investment stability of the fund
ratings by agencies which measure fund performance
whether it is geared or intends to be
the size and age of the fund.
One final factor to consider in the process is the fees. Funds with abnormally high
entry/exit fees and charges often produce returns that are less than those offered by other
funds.
At the end of the day it is important to consider the after fees return and also the after tax
return of investments and the consistency of returns. It is OK to pay higher fees if the
investment has historically delivered a higher than average after fee and after tax return.
(Note: performance past is not a reliable indicator of future returns but can provide a
useful comparison to peers).
Generally, to maximise returns, the funds to choose are those with no, or low, entry/exit
fees.
3. What types of investors might be attracted to a managed investment scheme?
Investors:
who may have little time, interest, experience, ability to manage themselves;
who want quick entry into an area where they may have trouble investing directly;
who require diversification across fund managers as well as assets, locations, etc;
with small amounts of funds to invest;
who simply are happy for others to do the work for them;
In short, just about everyone!
4. A financial institution is planning to register a new MIS with the following asset
allocation:
Cash/fixed interest
Property
Australian shares
International shares
Alternative assets
15%
10%
35%
30%
10%
What sort of investor (in terms of risk preference) is being targeted, and what long term
real return (in excess of inflation) would you expect this fund to try to earn?
Given the strong weighting of shares and property, it would likely be an
investor with a preference for growth. Probably around 6-8% p.a target return.
5. What is the purpose of a Product Disclosure Statement (PDS)? Where can investors
find the PDS of a MIS that they may consider investing in?
The PDS gives all relevant information that a potential buyer of a financial product
needs to consider.
Types of asset the investment manager will target;
Target return of the investment;
Expected volatility of the investment (expected loss over a specified period);
Other potential risk associated with the investment;
Fees, costs and charges;
Investment features (minimum initial investment, ongoing investment minimums,
withdrawal timeframes, ability to switch between portfolios etc).
PDS are published as separate documents for each product and are available in hard copy
from fund managers or funds websites.
6. What type of MIS would you recommend to a highly risk averse investor?
A MIS with a lower risk profile such as a cash, fixed interest or conservative diversified
fund. Cash Management Trust, highly rated Bond Fund, Capital Stable Fund etc.