Five steps to choosing a managed fund

Article by Perpetual Investments, first published in Equity, October 2017)


Selecting a managed fund is easy right… simply look for the fund at the top of the league tables and sign on the dotted line. However, there’s more to finding the right managed fund than last year’s returns – after all, as the fine print says, past performance is not a reliable indicator of future returns. This year’s trail blazer may not suit your investment objectives or timeframe, or may invest in risky assets you don’t understand or want exposure to. With hundreds of funds, it’s important to have a planned approach to assess the options available to you.

Step one: Self-evaluation – understand your risk profile, investment objective and timeframe

Each investor’s risk tolerance differs. While we’d all love high returns and no risk of capital loss, the fact remains that the higher the prospective returns from an investment, the higher the potential risk.

A quick Google search of investor risk profiles will produce a myriad of questionnaires and descriptions of risk profiles; most run over four – six categories, and can be broadly summarised as follows:

Figure one: Risk profiles
Conservative
Low risk tolerance, will accept lower returns for higher capital stability.
Balanced
Prepared to take a small amount of risk for better returns over the longer-term.
Growth
Reasonable risk tolerance, values higher long-term returns and is willing to endure shorter-term volatility to achieve them.
High Growth
High risk tolerance, generally willing to take greater levels of risk for higher returns; may tolerate significant volatility and potential losses in pursuit of higher capital growth. 

The investment strategy of a managed fund should align to your risk profile, investment objectives and investment timeframe. These factors are intertwined – an investment objective of a managed fund suitable for an investor with a high growth risk profile would generally have a high capital growth objective and a longer-term time horizon. Conversely, a managed fund suitable for a conservative investor will often have an investment objective focused on capital stability and a shorter investment timeframe. 

Step two: Consider the asset class

Managed funds may invest in a single asset class, such as equities, or across several asset classes. Some funds are multi-manager, with a number of fund managers looking after a specific asset class within a single fund structure – the idea being to get the best person for the job in each sector.

Single and multi-asset class funds have varying levels of risk and return; it’s important to match the expected risk and return of the fund to your personal risk profile.

 Step three: Consider the type of managed fund 

The myriad of funds on offer fall into distinct categories. Do you want to invest in an actively managed or passive index fund, one that’s exchanged traded, or a fund with an ethical investment approach? 

Active versus passive

In an actively managed fund, the fund manager makes buy and sell decisions in line with the fund’s investment strategy, to generate above benchmark returns after fees and expenses. Passive funds generally track an index, such as the S&P/ASX 200, and deliver returns in line with that index, less fees and expenses.

Listed versus unlisted

In the listed realm, there’s an ever-growing range of exchange traded funds (ETFs), including the newer ‘active’ ETFs. Unlike traditional managed funds, ETFs – both active and passive – can be traded in the same way as shares. Listed Investment Companies (LICs) provide another way to access a diversified portfolio in the listed environment.

Ethical investments

Ethical investments have been stealing headlines for a while now; typically, they comprise assets that are broadly defined as ethical, which may forbid or limit exposure to investments such as tobacco, weapons or gambling stocks. The definition of an ethical investment varies widely; read the investment guidelines to ensure they align with your views.

Step four: Past performance

The fine print says it all – past performance is not a reliable indicator of future returns. While you shouldn’t base an investment decision solely on a fund’s recent performance, it’s worth using performance data to discern whether a fund has met its investment objective over time, and assess how it has performed in different market environments. When comparing performance data, be sure it’s on a comparable basis – preferably after fees. If it’s a new fund, see if the management team has a track record elsewhere that augers well for the new fund – sometimes getting in early can pay off.

Step five: Read the Product Disclosure Statement (PDS)

Once you’ve narrowed the field, it’s time for some light reading. The PDS contains a lot of valuable information. It details the fund’s investment objective, details of the management team and investment philosophy, and outlines the fund’s investment strategy. The PDS also specifies the fees and charges; important because fees can have a significant impact on the fund’s returns over the long term. 

There are many managed funds available to you and selecting the right fund may seem daunting. However, using this five-step strategy will help you take a measured approach to reviewing the options and finding a managed fund to meet your investment objectives.