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THE NEW ZEALAND INVESTMENT RESEARCH EXPERTS
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Tuesday, May 21, 2013.
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Frequently Asked Questions
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Who is FundSource Limited (FundSource)?
How Many Funds Does FundSource Monitor?
What is FundSource's Investment Research Philosophy?
How Does FundSource Rate the Funds?
What are the FundSource star based Fund Ratings?
What is the purpose of the FundSource star based Fund Ratings?
What is the FundSource Sharpe Ratio?
How are the FundSource star based Fund Ratings Calculated?
What is a Unit Trust?
Why invest in unit trusts rather than directly investing yourself?
What are the Main Asset Classes?
What are Superannuation Products?
What about Australian Unit Trusts?
What is an Insurance Bond?
What is a GIF?
What is a diversified or multi sector fund?
What are growth assets?
What are Defensive assets?
What is a Passive Fund?
What is an Active Fund?
What is a Capital Protected Fund?
What is a Closed End Fund?
What is a 'Hold-to-Maturity' value?
Who
is FundSource Limited (FundSource)?
FundSource
is a specialist investment strategy and funds management research
company. Prior to May 2001, the company was known as IPAC (established
in Sydney in 1983), after which a management buyout led to a
corporate rebranding. In September 2006, FundSource Research
Limited was bought by NZX Limited and renamed FundSource Limited
Under the new brand, continuity of business strategy, activities
and management in the New Zealand operation is being maintained.
The diverse professional and research backgrounds of the staff
gives FundSource the breadth of expertise necessary to conduct
in-depth research of financial products, fund managers, the
economy and other technical matters pertinent to investment.
It is also why most leading financial institutions and advisory
groups in New Zealand use FundSource's research.
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How Many Funds Does FundSource Monitor?
Approximately
600 investment funds (unit funds, personal superannuation schemes,
insurance bonds) totaling over $50 billion in NZ Household savings.
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What is FundSource's Investment Research Philosophy?
Quality research more than ever requires a diverse range of skills including those of investment analysts, asset specialists, economists, systems designers and computer specialists. FundSource has considerable experience in collecting, collating and distilling the vast amounts of financial information available into effective recommendations and user friendly research.
Four key principles underpin FundSource's investment process:
- Extensive research is essential to identify and monitor high quality investments.
- Diversification across assets, specialist managers and geographic regions, is critical to creating and preserving wealth. Effective diversification requires more than simply spreading investments at random.
- Tailoring portfolios to the individual is important since the best mix between the many thousands of investments available will depend on individual needs for income, growth, security, liquidity and tax effectiveness.
- Flexibility is required to allow the portfolio to adapt quickly to changing client needs and market circumstances.
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How Does FundSource Rate the Funds?
FundSource uses two separate research processes to monitor and rate managed funds.
1) Qualitative
2) Quantitative
FundSource's qualitative and quantitative research process has been extensively applied to the research and evaluation of an extensive range of International as well as Australian and New Zealand based fund managers since 1983.
1) Qualitative Fund Ratings
FundSource compiles qualitative fund ratings which are aimed to be forward looking assessments of relative fund prospects.
FundSource believes there are four primary factors, which compromise the essence of a funds management organisation. These four factors are encapsulated in the common acronym known as the 4 P's, represented by the following elements: People, Process, Portfolio and Performance.
People
It is FundSource's belief that the foundations of any organisation are its People and as such the future quality and success of that organisation is dependent upon the skills, knowledge and capability of its personnel. This applies not only to senior management and those vested with decision-making responsibility, but also to all parts of the organisation.
Process
When FundSource analyses the Process factor, it is looking at features such as the strength and appropriateness of the decision making structure, the perceived level of decision making effectiveness, the investment philosophy and approach to investment management, the type of investment culture engendered by the process, the depth and extent of research and how it affects the buy and sell decision making process, the quality of inputs into the decision making process, the clarity of the investment strategy and the perceived level of discipline and consistency within the process.
Portfolio
At a Portfolio level, FundSource seeks to understand the basis
on which portfolios are constructed and managed. This entails
combining investment process factors such as identifying the
investment style and philosophy with the set of constraints,
which have been overlayed on the portfolio. For example FundSource
are looking at the appropriateness of the risk/return profile
of each portfolio, a clear understanding of the objectives or
benchmarks against which its performance will be measured, the
level of tracking error (if any) that is targeted, the degree
of turnover to be expected and the level of concentration to
be found in the portfolio's holdings.
Performance
Finally, FundSource examines the Performance of a portfolio in a number of different ways to see how it has done on a historic basis and to determine whether there is any information contained in that performance which may point to performance in the future.
To assist in this area FundSource looks at the discrete and cumulative performance versus benchmark indexes and versus peers over varying periods of time. FundSource also looks at the risk-adjusted performance of the portfolio to ensure that we are measuring different funds on an equivalent basis and we look to see how consistent performance has been over time.
FundSource's qualitative Fund Ratings are supplied under a research subscription service to Fund Managers and Investment Advisers throughout New Zealand.
2) Quantitative Fund Ratings
The star based Fund Ratings in FundSource's website are based on FundSource's quantitative assessment of the funds.
FundSource's quantitative star based Fund Ratings were developed to assist clients and investors evaluate the quantitative trade-off between risk and return for an individual fund relative to other funds in the sector.
The ratings are intended to provide an historic risk-adjusted performance measure which should be used for illustrative purposes only. The ratings are purely quantitative and do not reflect FundSource's qualitative opinions, nor do they portray the fund's future performance potential.
The FundSource star based Fund Ratings are neither predictive measure nor a recommended/not recommended commendation. It should be noted that the Fund Ratings view funds as individual investments (as do the qualitative ratings) and not as part of an overall portfolio.
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What are the FundSource star based Fund Ratings?
The FundSource star based Fund Ratings were developed to assist clients and investors evaluate the trade-off between risk and return for an individual fund relative to other funds in its sector.
The FundSource star based Fund Ratings are based upon the Sharpe Ratio.
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What is the purpose of the FundSource star based Fund Ratings?
To convey historic risk/return relatives. The ratings are intended to provide an historic risk-adjusted performance measure which should be used for illustrative purposes only. The ratings are purely quantitative and do not reflect FundSource's qualitative opinions, nor do they portray the fund's future performance potential.
FundSource star based Fund Ratings are calculated monthly.
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What is the FundSource Sharpe Ratio?
The FundSource Sharpe Ratio provides a record of the historical return per unit of risk incurred by a fund, adjusted for a time value of money component.
The FundSource Sharpe Ratio is a three year risk-adjusted performance measure.
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How are the FundSource star based Fund Ratings Calculated?
We firstly calculate the FundSource Sharpe Ratio. Next, we compare the FundSource Sharpe Ratio of one fund with FundSource Sharpe Ratios of all the other funds in a sector. Each fund is then credited with a star based FundSource Fund Rating according to its percentile rank relative to other funds on the following basis:
 15% Top
 20% Next
 30% Next
 20% Next
 15% Bottom
Only funds that have a three year performance history can have a star based Fund Rating calculated.
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What is a Portfolio Investment Entity (PIE)?
From 1st October 2007 a fund could elect to become a Portfolio Investment Entity (PIE), as a PIE each fund will allocate all its taxable income (losses) between the unit holders in the fund. The fund manager will then calculate the tax payable on that income under the Prescribed Investor Rate of each investor. This is a final tax currently at a maximum of 33%.
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What is a Unit Trust?
A unit trust is a pooled investment vehicle whereby individuals pool their savings together and invest in shares, property, fixed interest or other types of securities.
The administration and management of a trust is handled by a Manager who accepts contributions from investors and invests on their behalf. The legal ownership of the trust vests with the Trustee on behalf of the investors.
Investor's contributions are divided into units, the value of which will fluctuate depending on the value of the Trust's underlying investments. This fluctuation will be reflected in the price of the Trust's units. Unit Trusts offer a wide range of income and growth combinations, to suit investors with different risk profiles and investment needs.
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Why invest in unit trusts rather than directly investing yourself?
A unit trust allows small investors to do what they would not otherwise be able to do: diversify (spread) their risk. Normally an investor with say $1,000 to invest will have few investment options open to them. They can put it all in the bank or they can buy some shares. If either of these forms of investment go bottom up, then the investor faces losing all or part of their investment.
If an investor wishes to "spread the risk" (not to "put all their eggs into one basket") they would have to put say $500 in the bank and buy $500 worth of shares on the stock market, with a few safe bets like Telecom and AMP and a few risky investments in smaller companies. This would involve a lot of work on the part of the investor to ensure that they optimise the return on their investment, and the actual diversification would be minimal.
However, if 1,000 small investors pool their $1,000 into a unit trust, then the unit trust can take this $1 million and invest it in a multitude of places to enable small investors to maximise their investment while spreading their risk. The fund can invest into property, overseas shares or bonds, foreign currency, etc. which would normally be beyond the scope of a small investor.
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What are the Main Asset Classes?
There are four main asset classes available to individuals- CASH, FIXED INTEREST, PROPERTY and EQUITY. Each asset class is subject to varying levels of risk and return. Investors invest in a combination of asset classes based on their risk/return preference.
Cash eg Term Deposits (90 Day Bank Bill)
Fixed Interest eg Mortgage, Government Bonds, Corporate
Bonds (e.g. Lion Nathan, Fletcher)
Property eg Commercial, Industrial, Rural, Residential
Equity e.g. Transport (Air NZ), Telecommunication (Telecom)
Cash
Investment in cash includes term deposits, on call savings accounts and short term money market investments such as bank bills.
Cash is held by people who need immediate access to their money. Cash type assets are considered to be lower risk in comparison to other types of investment, but also provide lower returns.
Fixed Interest
Fixed interest securities are essentially loans to companies and government organisations. This includes government and local authority stock and corporate bonds. A fixed sum is paid to the investor (lender) by the borrower (company, government, local authority) over the life of the security.
Fixed interest securities are less risky than equities and property, but more risky than cash investments.
Property
This type of investment includes Residential, Commercial, Retail, Industrial and Rural property. The return generated from a property investment will be determined by a number of factors such as rentals, location, size of property, demand and supply, etc..
Property is regarded as more risky than cash or fixed interest securities but less risky than equities.
Equities
Equities also known as shares, enable investors to participate in the risks and rewards of owning a business. Return on share investments is realised in the form of dividends and capital gains.
Shares can be a volatile investment choice but they offer the highest possible return in comparison to other investment choices.
For more information on the different asset classes go to Learn With FundSource
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What are Superannuation Products?
A Superannuation Scheme is a professionally managed investment vehicle in which people can invest for their retirement. Like a unit trust, superannuation schemes have a Trust Deed administered by a trustee who performs a similar function as for a unit trust. The scheme has a Manager and investors are treated proportionately as beneficiaries and although legal ownership vests with the Trustee, beneficial ownership is conveyed to scheme investors.
Unitised superannuation schemes operate in a very similar way to unit trusts with returns reflecting fluctuations in the returns of the scheme's investment assets. Superannuation schemes are available in two broad categories - Employer sponsored scheme and Personal Scheme.
All assessable income of the trust is taxed at 33% . Contributions made by investors are taxed but withdrawals are exempt from further tax.
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What about Australian Unit Trusts?
An Australian unit trust is a pooled investment vehicle whereby individuals pool their savings together and invest in shares, property, fixed interest or other types of securities in the Australian market.
The administration and management of a trust is handled by a Manager who accepts contributions from investors and invests on their behalf. The legal ownership of the trust vests with the Trustee on behalf of the investors.
Australian unit trusts are treated as trusts for Australian tax purposes, this differs from New Zealand where unit trusts are treated as companies. Distributions from Australian unit trusts are subject to Australian non resident withholding tax where applicable, based on the nature of the components of the income distributed. Any tax deducted in Australia is generally creditable against New Zealand tax payable so that no double tax will arise, provided Australian tax paid is no more than New Zealand tax paid on the same income.
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What is an Insurance Bond?
Insurance bonds are single premium insurance policies which provide investors with access to a pooled investment fund. While technically insurance bonds are life insurance policies, managed insurance bonds are more appropriately regarded as managed investments that possess the flexibility of other managed investment vehicles. However, insurance bonds are taxed differently by reason of their insurance status. In addition, insurance bonds are not required to have a Trustee to supervise the activity of the bond manager.
Like unit trusts a bondholder gains entitlement to units in the fund in proportion to his or her contribution, with the bond price reflecting the fluctuations in the fund's underlying investment. Insurance Bonds are structured to provide capital growth without any income returns. The only way to receive the benefit of this return is to redeem units.
Redemptions from insurance bonds are not subject to tax, however no imputation credits are passed along to investors at redemption. Tax is paid on investor's behalf. This means that all returns are "tax paid" in investor's hands.
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What is a GIF?
Group Investment Fund
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What is a diversified or multi sector fund?
A diversified or multi-sector fund sees an investment spread over a range of asset classes under one umbrella. The theory is that, should one investment fall in value, others may hold or increase their value.
Diversified funds can be classified as Defensive, Balanced or Growth.
Defensive funds have less than 30% in growth assets and are mainly income producing.
Balanced funds have more than 30% but less than 70% in growth assets.
Growth funds have more than 70% in growth assets. They try to make capital gains rather than earn income.
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What are growth assets?
Assets which have the potential to achieve capital growth over the medium to long term; primarily regarded as shares and property. They are positively correlated with the business cycle.
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What are Defensive assets?
Assets which have the potential to achieve income growth over the medium to long term; assets which are negativity correlated with the business cycle primarily regarded as cash and bonds.
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What is a Passive Fund?
Passive funds
follow an index, constraining their overall risk in relation
to the market benchmark (i.e. NZX 50 Gross Index is the benchmark
used for New Zealand equity funds).
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What is an Active Fund?
Funds categorised as 'Active' are those where managers look to buy undervalued assets and sell them when they grow in value. They may therefore outperform or under-perform the chosen index.
What is a Capital Protected Fund?
Capital protected investments are typically closed end funds, where the fund has a limited time span, which provide full / a specified level of capital protection at maturity. Capital protection at maturity means that you will receive back 100% of the combined amount invested and any early bird interest received (earned during the offer period), less any entry fee charged. Capital protection only applies at maturity, or early maturity if that feature is triggered.
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What is a Closed End Fund?
Closed end funds raise a fixed amount of capital through an initial public offering (IPO). The fund may or may not be traded on a stock exchange. Unlike 'open-ended' managed funds, closed end funds are closed to new capital after operation begins, and will usually have a specified investment term (sometimes with a clauses for this to end sooner should performance exceed expectations).
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What is a 'Hold-to-Maturity' value?
Used at times to represent performance for capital protected funds, the hold-to-maturity (HTM) value is a hypothetical value which reflects the relevant level of capital protection plus the formula of returns which apply at maturity. The HTM values are not a market value or a value at which investors can exit the fund. It represents what the value of each unit would be assuming it was maturing today and had been held for the full term (i.e. the capital protected amount plus the fixed formula of returns that can be paid). The HTM value gives investors an indication of how their investment is performing at the time the calculation is made. Any gain in excess of the capital protected amount is an indication of the performance of the index multiplied by the exposure the fund has to the index. The HTM value is calculated by adding together any accrued annual return and any growth in the underlying investment, since the investment start date.
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