funds clearly have their advantages, though it is questionable whether the average
investor is familiar with these benefits.
Fundamentally, the main benefit of
professionally managed funds is that they provide access to an investment that offers
numerous investing opportunities that the individual investor would otherwise not have
been able to access.
Additionally, the wide variety of
managed funds available ensures that the personal requirements of each individual investor
may be met. Whether high risk/high capital growth investments or the low risk investment
that provides consistent income over a period of time, managed funds offer solutions for
almost every investor.
The reasons that managed funds can be
tailored in such a fashion is due to the inherent and well documented benefits listed
Theses main advantages include:
- Diversification/Spread of risk
- Professional management
- Buying strength
- Access to International markets and
Diversification/Spread of Risk
Managed funds can hold from 10 up to
several hundred different investments. These investments can be diversified across
countries, asset classes, industries and companies. A diverse portfolio
reduces the impact of any fluctuations in an investments market value.
For example, take an individual investor
and a managed fund with an investment universe of stocks A, B, C and D. The first investor
holds $100,000 of stock C and a managed fund holds $100,000 of stocks A, B and C, equally
weighted. If the market value of stock C declines by 10% then the first investor would
lose $10,000, whereas the managed funds loss would be limited to approximately
$3,300 or 3.3%.
While a personal investor may feel that
they can diversify themselves, it might be interesting to know that statistically
significant diversification can only be achieved with a portfolio of over 40 stocks!
Fund managers are experienced and
qualified professionals who specialise in the selection and maintenance of investments.
The manager maintains extensive contacts outside the firm and has access to detailed
information, which together with in-house expertise, allow it to make informed timely
decisions on behalf of investors.
Fund managers are in constant touch with
the markets they invest in, thus providing a particular advantage for investors wanting to
invest in markets or sectors in which they have little or no experience.
Strength/Economies of Scale
Buying strength comes from the ability to
buy in bulk. That means that the costs can be reduced if the fund manager negotiates
better deals for you. By pooling your assets with other investors through managed funds,
you also gain access to a variety of investments that you may have not been able to invest
in as an individual.
Managed funds provide private investors
with access to markets and strategies that rely on economies of scale. The commercial
money market will not even talk to an investor who has less than $1 million, but private
investors can access this market through cash management trusts. Similarly, a small
investor seeking to run an active, diversified, international share portfolio directly
would be undermined by broking and logistical difficulties.
International equity trusts, however, can run an active book in which broking costs
represent only a fraction of the portfolio.
The pooled investment vehicle allows investors with as little as $1000 to hold major
stocks, invest in prime commercial property, ride the yield curve and dabble in
international securities. Moreover the investor can usually add, subtract or switch
investments across the asset classes with relative ease.
There are cost savings, too, for fund managers. Because they are buying and selling large
amounts of investments on a regular basis, they can negotiate much lower transaction costs
than you can as a private investor.
Access to International Markets and Investments
Managed funds provide the personal
investor with the opportunity to invest their money across the world, depending on what is
requested by the investor.
For example there are funds that invest
directly into established markets such as Europe, Australia and the United States. There
are also funds that invest into specific regions such as Europe and Asia and there are
funds that even invest into emerging markets, such as Western Asia and Latin America.
While the personal investor may indeed be
able to invest through their broker internationally, through a managed fund you are
allowing experts to invest in the best possible international investments, dictated by the
funds' predetermined mandate.
Fund managers are tapped into worldwide
information networks which provide not only information on local opportunities but also
stock specific information from the world over. fund managers have access to as much
information on a stock in Egypt than one right here in New Zealand. This quite simply is
out of the normal personal investor's capabilities.
Another advantage of using a managed fund
is that the manager will look after all the paperwork for you, the buying and the selling,
the decisions on rights issues, the collection of income, rent and dividends and so on.
And then, on a regular basis, the Fund Manager will report to you on the performance of
Overall, managed funds allow the personal investor the luxury of many benefits that
otherwise would have been out of their reach. Solid diversification and spread of risk,
professional research, and access to timely information are just some of the advantages
that when placed in context of the previous three weeks, highlight the benefits that
current investors in managed funds are already experiencing.