Management
FINS2643
Lecture Wealth 5 Tutorial 6 Managed Funds
Lecture 5 Summary
NAV = (Assets Liabilities)/ # Shares
HPR = (End Price Beginning Price + Income & Capital Gain distribution)
Beginning Price
Average X-year return = [(1+r1)(1+r2)(1+rx)]^(1/x) - 1
Sharpe Index = (R rf)/
Jensen = RP rf (Rm rf)
A managed fund is organised as a separate trust and is owned by the unit holders, not
by the firm that runs it. The fund is by a single responsible entity which invests and
manages money and looks after the rights of investors.
Management company run the funds daily operations, sell fund units
Investment/Portfolio manager buys and sells shares/bonds and oversees
the portfolio
Trustee (or custodian) safeguards the securities and other assets of the fund
without taking a role in investment decisions
70% super funds: 15% tax on earnings 10% on capital gains
Listed v Unlisted
Unlisted funds
Open-ended funds (issues new units)
Closed-ended funds (no longer accept
new money)
Listed funds
Closed ended with fixed number of
units
Trade at premium or discount (more
often) to NAV
Suits investment in illiquid or difficult
to access assets
Exchange traded funds (ETFs)
Open ended & listed
Primary market for unit creation and redemption operating in conjunction with
a secondary market, traded on the exchange
Ensures price parity between traded unit price on secondary market and NAV
Appropriate for diversification, exposure; certainty of price; index & active
Units
Fund divided into units of equal value
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Open unlisted unit trusts continue to issue units & update prospectus/6 mths
Super and insurance are nearly always open
Units valued daily/weekly; listed funds valued on share market
Types of Managed funds
By assets:
o Cash management trusts
o Fixed interest
o Property trusts
o Share or equity trusts
o Diversified funds
o Index funds
o Ethical funds
o Mortgage funds
o Hedge funds
o Exchange traded funds
By strategy
o Active funds (Higher feeds and trading)
o Index funds (Lower fees, lower trading)
Mastertrusts
Funds of funds (invest directly in asset classes)
Pros of Managed funds
Easy and time effective
Economy of scale
Diversification
Divisibility
Regular source of income
Cons of Managed funds
Charge fees: entry, exit, ongoing
Ongoing management expense ratio
(MER) .5-3%
Not managed on after tax return focus
A run could occur
Wrap accounts
Wrapping investments into a single account
Administrative service
Can still hold and trade shares in wrap structure
Homework Tutorial 4
Chapter 7
Question 7.4: What regulations control the operation of managed funds?
Must be licensed by ASIC.
Must provide an approved Product Disclosure Statement or Prospectus to
potential investors.
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If losses are incurred, due the admin mistakes of the fund managers, industry
ombudsman Financial Industry Complaints Service
Specific regulation of activities covered in the Commonwealth Managed
Investments Act.
Treated as a tax-exempt organization, so it does not have to pay income tax if
their taxable income is fully distributed to the unit holders.
Question 7.5: What are the key fees and costs associated with using a managed
fund? The key fees include:
Entry fees
Exit fees
Commission
Management expense ratio
Transaction Costs price of buying and selling securities
Feeder fund fees may have to pay fees for both
Adviser service fee
Question 7.6: What is the difference between a listed and an unlisted fund?
Unlisted funds
A type of managed fund in which investors buy units from, and sell them back
to, the fund itself.
There is no limit to the number of units the fund can issue.
Funds will guarantee the re-purchase of units from investors.
The dominant type of managed funds.
Listed funds
A type of managed fund in which investors buy and sell units in the open
market.
Operate with a fixed number of units and dont regularly issue new units.
The fund plays no role in the transactions.
Unlisted funds vs listed funds
Listed funds do not have to be concerned about keeping cash on hand to meet
redemptions.
funds Listed are more aggressive in their investment styles and commit to
longer-term investments.
Listed funds can concentrate more on a set portfolio of securities.
Units in listed funds can only be traded through brokers: units in unlisted
funds are traded with the fund managers themselves.
Large transactions with unlisted funds do not affect the price; these
transactions with a listed fund could greatly affect the price.
Differences in the pricing of units listed as per market trading; unlisted as per
redemption price.
Question 7.7: Why are property funds normally listed?
Property is regarded as a relatively illiquid asset.
Real estate mkts can be volatile & subject to adverse /low trading conditions.
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Funds focusing on property prefer listing to facilitate liquidity and trade and
avoid consequences of adverse market conditions of the underlying assets of
the funds.
Hard for fund manages to keep investing in property as they get demand for
new units
Question 7.8: Briefly describe each of the following types of managed funds:
Aggressive growth funds
A highly speculative managed fund that seeks large profits from capital gains.
Often buy shares of small, unseasoned companies
Can use both leverage and derivatives to improve returns.
Do well when market is good
Equity-income funds
Emphasis is on current income and capital preservation.
Invest mainly in high-yielding shares, some convertible securities and
preference shares.
Low-risk investment e.g. blue chip shares
Growth-and-income funds
Seek both long-term growth and current income, with primary emphasis on
capital gains.
Most of the funds money is invested into equities.
Contain substantial risk but have also offered substantial returns.
Growth funds
Primary goals are capital gains and long-term growth.
Invest mainly in well established, large- or mid-cap companies with aboveaverage growth potential.
Many involve a large amount of risk exposure.
Viewed as long-term investments for the more aggressive investor.
Fixed-interest funds
Primary objective is income generation.
Invest exclusively in various types and grades of bonds.
More liquid than bonds more diversification can be achieved
Interest can be reinvested
Socially responsible funds
A fund that actively and directly incorporates ethics and morality into the
investment decision.
Consider only those companies that meet the funds moral, ethical or
environmental tests for investment.
Question 7.11: Why are wrap accounts important to small investors?
Reduce administrative and portfolio management burdens for small investors
by assuming responsibility (for a fee) to overview and supervise the investors
investments and undertake related administration.
The wrap provider generates regular reports detailing performance, dividends,
distribution and tax relevant data.
Question 7.15: Identify three potential sources of return to managed fund
investors and briefly discuss how each could affect total return to shareholders.
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Income distributions: payments made to unit holders derived from dividends,
interest and other income earned on the holdings of the fund.
Capital gains distributions: payments made to managed fund unit holders that
come from the profits that a fund makes from the sales of its securities or other
assets.
Unrealised capital gains: capital gains made only on paper, that is, it is not
realised until the funds holdings are sold.
Funds have the above three as sources of return, together with changes in price
discounts/premiums.
Problem 7.3
Any account of changes would include:
movements in market interest rates,
changes in demand for bond funds,
changes in ratings and new competition from other bond funds.
Problem 7.4
The return can be determined on both NTA based and market price based data.
HPR = (End Price Beginning Price + Income & Capital Gain distribution)
Beginning Price
Originally trading at a premium, 1 year later trading at discount
Problem 7.7
Trading at premium (1.85)
Sell at NTA
NB: See Blackboard solutions for detailed solutions to the problems
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