Stacked Finance

A look at the world of Finance…

I passed!

So I am now RG146 compliant.

Thank you for following on this journey with me.




Topic 5 – Analysing and Evaluating Managed Investments

Yay! This is pretty much part of what I do for work. The header image is also a reasonably accurate representation of how my days look. So welcome aboard, hopefully this is short and sweet and one instalment.

Objectives & Strategy:

Fund Managers and REs undertake a number of processes when developing funds and investment opportunities for the market. When starting from scratch generally the important steps are defining the investment objective, formulating the strategy, implementing the strategy and monitoring outcomes. Multi Sector Funds are complicated and the process to get going, although all funds from an industry professional are complicated due to the many moving parts and compliance and legal obstacles to dodge. See below the sample process for Multi Sector Funds:

Development Process

Changes in the fund once investors have started investing into it are difficult, costly, and time consuming, which isn’t in the interest of the investors, which could damage reputations of the RE and the Fund Manager. Funds should be refined, however to continually improve the fund and optimise its returns.

Risk-Return Profiles:

We’ve seen a number of different areas where risk v return has been explained and if you still don’t understand, go back and read any post tagged with RG146. Essentially, the higher the risk, the higher the potential returns. See below:


We’ve heard all about the above way of describing the asset allocation of funds, but there are other ways to describe the funds as well.

Defensive — investment is primarily in cash and fixed interest securities with may be a small investment in growth assets (e.g. shares)

Conservative — mainly defensive assets (cash and fixed interest) with, for example, 30% in growth assets such as shares and property

Moderate — balanced between growth assets (shares and property) and exposure to defensive assets (cash and fixed interest)

Growth — focus is on growth assets such as shares and property; defensive assets such as cash and fixed interest provide income

High Growth — is often almost 100% in growth assets such as shares and property.

Check out the below for typical asset allocations as well.

asset allocation

In formulating a strategy for investment, several questions need to be asked and answered.

  • Which asset class or classes are appropriate for investment to meet the fund’s objectives?
  • What is the expectation of long-term relative performance of the selected asset class or classes, via a strategic asset allocation (SAA)?
  • Should a passive approach to asset allocation, such as rebalancing to an SAA, or a more active style, such as tactical asset allocation (TAA), which requires short- or medium-term changes to asset allocations, be adopted? Which style would best serve the fund’s objectives?
  • Should each asset class portfolio be managed by investment teams associated with the fund manager, or outsourced to one or more external investment management firms that specialise in certain areas outside the manager’s expertise?
  • Should each asset class portfolio be managed actively or passively? Which would best serve the fund’s objectives?
  • What currency hedging strategy, if any, should be adopted?
  • What use would the fund make of derivative instruments? And for what purpose?

Investment Style & Philosophy:

Investment Style is usually what sets Fund Managers apart. For example, my company sets their style as secure, stable and reliable. We do extensive research before selecting assets and so do our partners.

The styles and strategies used by investment managers when selecting and managing investment assets can tell an investor a great deal about what to expect from a particular manager when a certain market event or trend occurs. It is important that an investment manager remains true to their style, as this gives investors comfort that the particular risk–return balance that they have chosen through selecting that investment manager will be provided in the future.

Having an understanding of a particular investment style does not give the investor certainty over what an investment manager’s performance will be, but it does give an indication of what can be expected from that manager in comparison to their peers given the same set of market conditions.

There are a number of broad style categories that managers will generally fall into, which usually result from investment philosophy. The two most important are active & passive management.

A portfolio manager will decide which approach is more suitable to the fund’s investment philosophy, what the costs are compared to expected benefits and what the risk is of underperforming against the fund’s investment objectives.

Active Management:

As the name suggests, this style displays a lot more of a “Hands On” approach to investment management. The goal is to outperform the benchmark by being overweight (holding more assets than the benchmark) or underweight (holding fewer assets than the benchmark) in particular assets or asset classes.

Passive Management:

A passive management style seeks to provide returns equivalent to a relevant performance benchmark, with a very low tracking error. Tracking error is a statistical measure that states how much performance variability around a benchmark can be expected from a fund. For example, a tracking error of 1% means returns are expected to be within 1% of benchmark returns. Index funds usually have tracking errors far less than 1%. In fact, they usually aim for a tracking error of approximately 0%.

In order to achieve this return profile, passive fixed interest managers, for example, must ensure that the portfolio’s sensitivities to factors, such as changes in interest rates, yield curve shape and sector spreads, are the same as the benchmark portfolio. This approach is also often called ‘indexing’.

Passive portfolio management is considered a conservative style, as it should consistently deliver benchmark returns. It does not provide the opportunity to achieve outperformance of benchmark returns, but it also does not leave the portfolio exposed to potential underperformance.

Other Considerations:

Stock selection is the process of choosing the securities to buy and sell within the asset classes, for example which shares to hold in an Australian equities portfolio, which bonds to hold in an Australian fixed interest portfolio, and whether to hold more 10-year bonds than 5-year bonds. Stock selection also includes the decision of how much to invest in the chosen securities.

There are two principal approaches to active security selection:

Bottom Up attempts to analyse each security and to hold those that show more potential for price appreciation. The goal is to outperform the benchmark by ‘stock picking’ individual share investments.

Top Down attempts to consider macroeconomic region/country and sector views, prior to choosing individual assets for investment.

Some investment managers may base their investment selection primarily on the basis of information derived from either top-down, thematic or bottom-up analysis, while others adopt a combination. These methodologies should be considered in conjunction with style in ‘defining’ managers of single asset class funds, for example, the manager might be a top-down, growth or a bottom-up value manager.

Tops and Bottoms.PNG

Asset Allocation:

Asset allocation involves making decisions about which asset classes & how much to invest in and when to buy or sell a specific asset.

The investment manager’s task in a multi-sector fund is to select an appropriate asset allocation to achieve the portfolio’s objectives over the relevant time horizon, in line with their investment philosophy.

Both the fund’s asset allocation and security selection can be viewed as portfolio selection decisions. The asset allocation decision results in a portfolio comprising asset classes, while the security selection decision within each asset class results in a portfolio of individual securities.

Asset Allocation Style How it Works
Strategic Strategic asset allocation (SAA), sometimes called the ‘neutral asset allocation’, is designed to meet fund objectives and is based on expectations about the long-term performance, and risk and correlation of each asset class.
Passive A passive (or strategic) approach to asset allocation selects the neutral asset allocation with the intention of maintaining it for the full investment period.
Tactical Tactical asset allocation (TAA), an active asset allocation style, is the process by which an investment manager regularly reviews and alters a portfolio’s asset allocation to take advantage of perceived misevaluations of markets. The objective of TAA is to add value to the portfolio by achieving a higher return than would be achieved if the fund’s asset class exposures remained at the neutral position, that is, the SAA.
Market Timing Market timing is a more extreme form of TAA. It involves making buy or sell decisions of portfolio assets based on expected short-term market movements. These predicted market movements may be based on technical or quantitative analysis.
Rebalancing Rebalancing involves actions to bring the actual asset allocation in line with the neutral asset allocation so that it does not drift away from the desired strategic position over time.

Diversified or Sector Funds:

Once the appropriate investment strategy for the multi-sector fund has been established, another important consideration is the structure of the investment management arrangements for the fund’s assets. The main approaches are:

  • a single-sector fund approach (using single asset class funds to build the multi-sector fund).
  • multi-sector fund approach (using multi-sector funds to build the multi-sector fund)

The multi-sector fund approach

The manager of a multi-sector fund may choose to implement their strategy by using the multi-sector funds (or capabilities) of other managers (internal or external). This approach means that the manager employs both the asset allocation skills and the security skills of others to build their fund. When using this approach, fund managers must regularly monitor the actual asset allocation that results from the underlying funds and adjust to ensure it is in line with their stated SAA, if necessary.

The single-sector fund approach

The single-sector fund approach employs sector-specific managed funds that invest in one asset class only such as Australian shares or Australian fixed interest securities.

It has also become conventional practice for managed funds to separate management of the asset allocation and stock selection functions. This allows for some degree of specialisation of each management function.

Investment Manager Selection:

In considering a fund manager of any sort, it is essential that certain criteria relating to investment are also considered. These can be summarised as the ‘four Ps’:

  • People
  • Philosophy
  • Process
  • Performance.

Monitoring & Review:

Monitoring a fund’s investment strategy involves monitoring both the investment management arrangements and the managers, to assess whether they are performing to expectations and whether the overall strategy is achieving its objectives.


When analysing performance, investors and fund managers should not look at the performance numbers in isolation — they must be compared to the performance of the market (benchmark) and the portfolio objective. Fund managers and investment managers review their portfolios against the benchmarks they have set. Passive managers regularly review against the relevant index and active managers review against their portfolio objective.

Some of the more commonly used index benchmarks are



Topic 4 – Managed Investment Structures – Part Three


Here we go for the third and final round. We have covered Single & Multi Sector Funds and Alternative Investments, if you’ve found yourself here and are confused, read Part One, Part Two and come back. On today’s menu…

  • Other Investment Schemes;
  • Investment Platforms; and
  • Costs of Managed Investments.

Other Investment Schemes:

Other Investment Schemes are just those that don’t fit into the previous categories. Examples include Exchange Traded Funds, Listed Investment Companies, Insurance Bonds, and Friendly Society Bonds.

Exchange Traded Funds:

Exchange Traded Funds or ETFs are managed investment vehicles listed and traded on the ASX and are usually index aware, meaning the hold a group of underlying securities that represent an index. These funds act like a listed Unit Trust, which is a simple way of explaining them. This is what my investment in Acorns AU is. I bought units in their ETF which then purchases shares in the securities according to a risk profile.

The benefits of an ETU include immediate diversification, easy monitoring of performance, easily traded, tax benefits from distribution of franking credits.

The main limitations of ETFs are that they often only replicate an index and therefore do not offer the prospect of material benchmark outperformance. Others will not hold an asset directly, but will use derivatives to get exposure to the asset (this is more common in commodity-based ETFs). This can lead to performance being quite different to the asset it is attempting to track.

While in its infancy in Australia, a broader range of ETFs is becoming available that offers more than simply index tracking, including ‘bear funds’ that use derivatives to profit from falling markets (and conversely make losses when the market rises).

It should be noted that although ETFs are listed, they are not considered to be ‘stocks’ or ‘shares’. Stocks and shares refer to companies listed on an exchange, rather than managed investments.

Listed Investment Companies:

These are corporate entities that invest in a diversified portfolio of assets which may include all of the asset classes. Listed investment companies (LICs) are corporate entities that invest in a diversified portfolio of assets which may include Australian or international shares, fixed income securities and property. Although similar to a traditional managed fund, they differ in that they are companies and are listed on an exchange. Therefore, participation is by a share in the company, rather than by units as is the case with managed funds. These shares can be traded on an exchange such as ASX.

Being a company, they are not required to distribute all income, while realised gains and income are taxed at the corporate rate. This can make them attractive to high net worth investors, while allowing the manager to smooth the level of dividend. (One disadvantage of unit trusts can be their changing level of distribution, which can make income planning difficult.) However, they also have the added advantage of capital appreciation as the value of their portfolio increases.

LICs are valued using the net tangible asset (NTA) valuation. However, an LIC does not necessarily trade at that price on ASX. An investor should ask whether the LIC is trading above or below the value of the underlying investments — its NTA. Trading above NTA is known as ‘trading at a premium’, and trading below is called ‘trading at a discount’. At any time, LICs may be trading at a premium or discount.

Although it is rarely the intention of the LIC to sell down their entire portfolio, this latter figure is helpful in understanding a worst-case scenario of the portfolio valuation should they sell down.

Although it appears rational that the share price of a LIC should be around the NTA value, this is often not the case. Most LICs trade within a reasonably large range (+/–15%) of their NTA and are often at a discount.

Many factors may play a role in determining the final buy or sell price for an LIC, including, general market sentiment, perceived quality of management, dividend history and expectations, liquidity, historic and expected returns, risk, and whether the LIC has any options attached.

As with any listed company, there may be special issues that result in additional shares being issued in the secondary market to existing owners. Examples include bonus issues and rights issues.

Insurance Bonds:

This one is essentially a life insurance policy. Insurance Bonds are

referred to as an ‘unbundled investment contract’ because the life insurance included in the contract is separately identifiable from the investment component. They are issued with a product disclosure statement (PDS).

Insurance bonds can either be established as a once-only investment or can allow a maximum rate of additional contribution each year according to specific regulations.

Advantages include a wide range of investment options, guaranteed redemption or withdrawal facility, and no personal income tax liability if held for at least 10 years.

Friendly Society Bonds:

These effectively mirror insurance bonds. In the past, differences regarding taxation rates and restrictions on the types of assets in which friendly societies could invest differentiated insurance bonds and friendly society bonds. Those differences have disappeared, so there is now no significant difference. In line with historical norms, however, many friendly society bonds are similar to capital stable or cash insurance bonds, with investments concentrating on low risk and low return.

The tax treatment of these bonds is very similar to that of insurance bonds in that they are tax-paid investments. The tax is paid by the friendly society, and the investor does not generally have any tax liability from their investment, as long as the bond is held for at least 10 years. These bonds pay tax at the company rate. The bonds are also issued through a PDS.

Investment Platforms:

We just call these Platforms. Essentially they are a place, usually online, that an investor can invest in a range of funds and fund managers through one spot. The types of platforms are usually Master Trusts or Wrap Accounts.

These platforms provide a central place for administration, single reporting and is usually where financial planners will spend a bucket load of time.

Most types of master trusts and wrap accounts are collectively known as ‘investor directed portfolio services’ (IDPSs). ASIC considers IDPSs to be managed investment schemes due to the fact that:

… they involve the expectation of cost savings (for example through netting of transactions or pooling of funds for the purposes of making acquisitions) or access to investments that are not otherwise available. (ASIC Regulatory Guide 148.19)

However, IDPSs do not satisfy several of the requirements of a managed investment scheme as defined by the Corporations Act 2001 (Cth), for example a lack of day-to-day control over investment decisions, or having investment decisions made by others.

An IDPS provides a menu of investment opportunities from which an investor can select. The client can choose any of those investments, either directly or by authorising another to act on their behalf (such as an adviser). They also have sole discretion as to which of those assets can be acquired or disposed of, although the assets may be held by a custodian for administrative ease and to minimise fraudulent activity.

Advantages Disadvantages
convenience in delivering consolidated tax and investment reporting for all investments held in the IDPS not having access to extra services provided by managed investment issuers, or the rights that accompany direct share ownership (since the assets are held in custody within an IDPS); such benefits may include client services of the issuer, discount cards or voting rights
access to wholesale-priced funds, which have lower fees and perform better than their retail equivalents due to the compounding effect of lower ongoing management fees the total ongoing management fee (that is, the cost of the service plus the cost of the funds) may sometimes be greater than the retail equivalent fund.
individual privacy of the investor and financial planner from the managed investment issuer
the ability to easily create a mixed portfolio of investment assets, all professionally held on the investor’s behalf.

A master trust invests in a range of other managed funds and other securities such as shares, with the individual investor selecting either the underlying investment product(s) and fund manager(s), or a preset portfolio of managed funds determined by a nominated risk profile. A master trust uses a trust structure and therefore has an RE/trustee and a custodian.

A wrap account (or service) is similar to a master trust in that it provides exposure to multiple investments. However, a wrap account acts only as a custodial service, with investments made in an individual investor’s name.

Wrap accounts consolidate various investments under one administrative umbrella and can include either managed funds or direct investments. Wrap accounts have become more popular than master trusts in recent years, now typically providing a more sophisticated offering, including a wider range of managed funds and access to direct share trading and other investment classes.

The ASX mFund service is a platform as well which provides a settlement service, so you can purchase units in an unlisted Trust as you would for listed securities on the share market.

Costs of Managed Funds:

As with everything, there is always some form of cost involved. Investing is no different. Managed investments usually have three types of fees that can be charged:

  • entry fees;
  • exit fees; and
  • ongoing fees.

Retail Funds:

Entry Fees have been scrapped industry wide as part of larger reforms, very few still charge an exit fee, its usually made up of a small difference in the issue and withdrawal price of units, the money is the ongoing fees. Ongoing fees are generally made up of:

  • a management fee for the fund manager;
  • custody fees for the custodian;
  • an administration fee for the administrator;
  • a fee for the RE; and
  • other operating expenses (e.g. audits, legal fees, brokerage).

In practice, due to the structure of a managed fund, all fees are initially paid to the RE. The RE then pays out fees in accordance with the contracts it has with the various service providers to the fund such as the investment manager and the administrator.

Total ongoing management fees are usually in the range of 0.2% to 2% p.a. for retail managed funds, depending on the asset class that the fund is invested in. Some asset classes, such as international equities, are more expensive to manage, while more simple index-based investments usually offer a significantly lower fee.

Traditionally, fees or commissions were paid to investment advisers (e.g. ongoing and entry fee commissions). These have now been replaced by fee-for-advice arrangements made directly between the investor and the adviser in line with the FOFA reforms introduced from 2012 onwards.

Wholesale & Mezzanine Funds:

Retail Funds tend to have higher fees due to the need for excess support of Investors. As Wholesale Funds have less Investors, but higher net wealth, their ongoing costs are substantially less than a Retail Fund.

Mezzanine Funds still need to provide a PDS, Wholesale only provide an Information Memorandum and so Mezzanine is slightly higher, fees wise, than Wholesale, but not as much as Retail.

IDPS Fees:

Platform costs can vary dramatically between the providers and most have their own way of calculating and charging fees but generally work on the size of the asset. As the asset gets larger, the fees get smaller.

IDPS platforms may also provide advisers an ability to have any ongoing fees that they charge to the client deducted directly from the client’s account.

Combined fees (IDPS fees plus the fees associated with underlying funds) are often on par with retail funds. However, they can sometimes be more expensive. On the other hand, some very cost-effective platforms can offer some investors a cheaper alternative to retail funds.

Indirect Cost Ratio:

Known as the ICR in finance worlds, the Indirect Cost Ratio is the measure of costs incurred by an investor for investing in a managed fund. It was introduced as a single fee measure that gives investors a guide to the relative costs associated with one fund compared to another. The ICR is designed to capture the investor’s total expense ratio and is consistent with international standards.

The ICR is the ratio of management costs not directly deducted from an investor’s account balance against the total average net assets of a fund over the preceding 12 months. It includes management fees, performance fees (if any), recoverable expenses, brokerage costs, administration expenses and other underlying fund costs. It excludes fees such as contribution fees, entry fees, adviser service fees, switching fees, termination fees and withdrawal fees.

Prior to the introduction of the ICR in 2006, the Management Expense Ratio (MER) was used and is still used for some investment funds today. Now its generally incorporated into the ICR. It was replaced because it didn’t reflect the total cost of investing in a managed fund.

Buy-Sell Spread:

The Buy-Sell Spread is basically a change in unit price to cover any brokerage costs involved in Investors entering or exiting a fund. For this reason three unit prices are issued for most funds either each day or month depending on the fund. These are the NAV (Net Asset Value) Price, Issue (Entry) Price and the Withdrawal Price. They will all be marginally different.

In the case of share funds, the spread can be up to 0.4% (0.2% each way), while direct property funds can have spreads of more than 5%. This reflects the high transaction costs associated with buying and selling direct property such as stamp duty and real estate agent commissions.

The buy-sell spread is usually larger for retail funds.

Managed Fund promoters also have the discretion to change the buy-sell spread at any point in time to better reflect the true costs of buying/selling the underlying assets.

Some mature managed funds (i.e. larger and more stable in the assets under management) may elect to have no, or a very small, buy-sell spread. This might occur when the dollar value of applications on any day is not dissimilar to the dollar value of redemptions and where the net inflow/outflow on any day is small relative to the overall size of the fund.

Performance Fees:

A performance fee is usually an additional fee over and above the basic management fee, and is paid when a fund exceeds the performance of the particular fund benchmark. When performance fees are available to the RE, standard management fees do tend to be lower.

A typical performance fee might be described as follows: if the fund outperforms the S&P/ASX 300 (Index or Benchmark) in any one calendar month, the RE will be entitled to 15% of that outperformance. The RE then usually pays out those proceeds to the fund manager.

Advantages Disadvantages
Performance fees rise/fall with the performance of the fund in relation to its stated performance criteria; a performance fee therefore incentivises a fund manager to perform well. A performance fee is sometimes an outperformance fee based on an index return, rather than an absolute amount (e.g. 10% p.a.). It is possible for an investor to pay the performance fee even though the absolute return may be negative. This occurred in 2002/03 and 2007/08 when a number of funds greatly outperformed their respective benchmark, while still earning only low or negative absolute returns. Paying a performance fee is unlikely to be well received by investors in these circumstances.
Performance fees tend to better align a fund manager’s interests with those of investors and limits the effects of conflicts of interest. A performance fee may also act as a ‘call option’ for the fund manager, with all the upside and limited downside. The manager may attempt to leverage the portfolio’s performance to the upside, at the expense of more risk and volatility, in a bid to earn potentially greater performance fees.
Investors perceive that the fee is earned as a result of a fund manager’s asset selection skill rather than from being carried by the market, and is therefore easier to justify for planners.

So there you have it. A very lengthy, albeit informative summation of Managed Investment Structures. Now lets all hope that the next two chapters are not as exhaustive.




Topic 4 – Managed Investment Structures – Part Two

Right, here we are for round two. Round one we covered Single Sector Funds, if you’ve found yourself here and are confused, read Part One and come back.

Multi Sector Funds

As the name suggests, these funds invest in a mix of asset classes and are also referred to as Diversified Funds. They also include the same asset classes as the Single Sector funds, but may also include alternative investments.

Asset allocation will vary from fund to fund and the asset allocation is the fund manager’s decision, diversified funds are loosely grouped together based on the broad split between defensive assets (cash and fixed interest securities) and growth assets (property, shares and usually, alternative investments). This broad split determines the risk–return profile of a fund, so investors can use this as a simplistic guide to select a fund that matches their objectives and risk profiles. You can see a sample of the fund splits below:

Diversified Funds

Whilst the Fund Manager has the discretion to change a funds asset allocation, they can only do so within the limits set in the Investment Mandate documents. Ranges are typically around 5–10% either side of a target allocation. This is an industry practice and will in the long run save money and minimise realised tax costs.

These types of funds are good for the investor who wants the asset allocation done for them and not have to invest in multiple funds for the same diversification exercise. My investment with Acorns AU in their ETF is an example of that. I have the diversification, but I don’t have to do any of the work. Plus, with the small change that I invest I can’t purchase 0.57 of a share on the market.

Capital Stable Funds:

As the name suggests, these funds are intended to be stable and so the majority of the assets are income assets rather than a growth profile. Although not completely risk defended. In some extreme global economic events, like the Global Financial Crisis, even these conservative funds would show some negative returns even if their asset allocation in growth funds is small. These funds tend to be heavily invested in the ‘safe’ or less volatile asset classes like cash and fixed interest or bonds. Most of these funds can experience negative returns in some circumstances, and so fund providers are not committed to positive short-term returns, concentrating instead on reasonably stable medium-term returns. An example of a Capital Stable Fund is below:

Capital stable

Capital Protected Funds:

These funds are quite similar to the Stable funds, however, Capital protected funds generally aim to provide some exposure to the higher return opportunities while using some mechanism, such as derivatives, to control the risk of capital loss. However, constantly maintaining a hedge against loss incurs significant costs, which will reduce the return in years when equities perform well. Investors should consider this hedging as being similar to insurance.

Newer versions of these funds include structured products, where exact details can differ dramatically between specific offerings. They generally provide higher levels of exposure to risky assets, while derivatives such as options provide the capital protection. Structured products generally have a set investment period (e.g. three or five years) with limited opportunity for liquidation during this period.

Since the GFC, the popularity of these types of products has waned and few are now issued.

Balanced Funds:

A balanced portfolio generally has an even split between income and growth assets, a Balanced Fund is not much different. Balanced Funds due to their exposure to growth investments are expected to provide a higher return over the medium to long term. Generally, superannuation funds use this as a default unless you change your preferred method of investment. Below shows examples of a Balanced Fund and a sample portfolio of what can be easily described as the ‘middle of the road’ type of fund.


Growth Funds:

Growth Funds are higher on the risk-return scale and generally provide higher returns because the risk is higher. Generally these funds should experience frequent short term volatility and losses, but over a time horizon of seven years should see higher average returns. See below for an example of a Growth Fund Asset Allocation and portfolio.


So there’s the Multi Sector Funds, onto other vehicles.

Hedge Funds:

Hedging means to protect the value of an asset. Think “hedging your bets”. In simple terms, Hedge funds offset the risky investments by taking an offsetting position in a similar investment vehicle to protect against adverse price movements.

A long position is one where a security is bought. Most funds are ‘long only’, that is, they are only able to buy securities. As a result, they buy securities they expect to outperform. Most funds that are long only often provide returns fairly heavily linked to a market such as the sharemarket.

A short position, or short selling, involves borrowing securities from another party, selling them at the current market price with an expectation that the market price will fall at a later date, then buying back the securities at the lower price and returning the securities to the original lender. The difference between the money realised from the sale of the securities by the short seller and the (lower) cost of purchasing the securities plus the fee for borrowing the securities, is the short seller’s profit.

Hedge fund returns are not as closely linked to specific securities or markets. Instead, they rely more heavily on trading strategies to generate returns, which should be more independent of market movements.

A hedge fund manager will use a wide variety of instruments and strategies, such as derivatives and short selling (depending on the fund’s mandate), to try to earn an absolute return, rather than a return measured relative to a benchmark, such as asset class or index performance.

A hedge fund’s goal is therefore to generate positive returns every year, regardless of the performance of the underlying securities market. This approach differs from traditional funds, which tend to focus on a performance relative to an appropriate index or benchmark.

A hedge fund manager will assert that their investment approach is more aligned to investor expectations than a traditional, benchmark-based managed fund. This is because a traditional fund manager can claim to have delivered an excellent result when they have achieved a higher return than the index, even if the benchmark’s return was negative and investors have lost money.

Historically, good hedge funds have had a low correlation to the underlying securities markets and can be useful in increasing a portfolio’s diversification, as long as the hedge fund manager’s work is of high quality.

Common features of a Hedge Fund include, investments across asset classes and markets, free choice in trading style and derivative instruments, restricted fund transparency, ability to leverage the original principal, frequent trades, size of positions.

Hedge Fund Strategy:

Hedge Funds are still relatively new in the Financial sector, below is a common breakdown of Hedge Fund Strategy.

Hedge strategy.PNG

Major strategies include taking a long position in an undervalued security and a short position in and overvalued security. Event driven where the market exposures of the fund are event driven. Example include merger arbitrage (go long the takeover target and short the company taking over the target) and distressed securities. Directional, where timing the market is key to the investment strategy.

These broad strategies include many variants or sub-strategies, the most common and important types of sub-strategies are:

Macro or global: An example of a directional strategy. This strategy invests in shifts in global economies or markets. Derivatives are often used to speculate on stockmarket, interest rate and currency fluctuations. They may be short term in their outlook, exploiting opportunistic investment possibilities wherever they may be found or could be longer term in their view.

Market neutral: An example of a relative value strategy. Equal amounts of capital, usually equities, are invested long and short in the same market. It attempts to neutralise market risk and capitalise on perceived mispricing by purchasing undervalued securities and short selling overvalued ones.

Market timing: An example of a directional strategy. This strategy anticipates the timing of investing in or out of markets, and the allocation of assets among investments, primarily switching between stocks, bonds and cash, depending on the market and/or economic outlook.

Short selling: An example of a directional strategy. The manager finds companies that have overvalued securities and shorts or short sells the stocks of those companies. These portfolios often experience rapid turnover in their securities in addition to the use of leverage or borrowing.

Multi-strategy: The manager switches between strategies as they deem necessary or employs several strategies simultaneously.


A common trait of hedge funds is that returns are often generated from active trading, with limited regard to the performance of the market as a whole. The fund’s performance should be the result of the trading strategy of the fund, rather than the performance of the underlying asset classes.

Consequently, the success of these funds is very dependent on the ability of the manager and the resilience of the strategy.

As global systematic data on hedge funds is scarce because of the lack of transparency and regulatory disclosure about their activities, it has been difficult to develop a benchmark for these vehicles. However, given the changes in this industry as a result of the GFC, regulation, disclosure and transparency have been increasing. This means better indices should become available over time. At the moment, indices commonly used include those provided by EuroHedge and Credit Suisse (global), and Australian Fund Monitors (Australian).

Apart from the potentially high returns, these non-traditional investments endeavour to maintain a very low correlation with traditional markets such as equities, bonds and property markets. This is mainly because they have the ability to make profits in both falling and rising markets through the use of futures and derivatives. This points to potentially considerable diversification benefits of adding these investments to a portfolio, as the overall portfolio risk may be significantly reduced.

Hedge funds have a number of advantages that warrant consideration for certain investors. However, it is recommended that only 5% to 10% of a total portfolio value be invested in this type of fund.


Infrastructure Funds:

Used to provide capital for the building or purchase of infrastructure. So I may invest in one of these types of funds one day just so I can say I paid for a road. These funds can be listed or unlisted and the underlying assets are usually either economic or social.

Examples of Economic Infrastructure include:

  • Transportation Links and Nodes;
  • Power;
  • Water; and
  • Telecommunications.

Examples of Social Infrastructure include:

  • Education Facilities;
  • Health Facilities;
  • Housing; and
  • Corrections or Detention Centres.

Typical characteristics of Infrastructure Funds are Government involvement, high initial capital cost, time consuming, typically measured in decades, illiquidity and others.

Alternative Investments:

Alternative Investments are the other asset classes continuing to be incorporated into the stable of managed funds, all of these types of investments are specialised and professional advice should be sought.

  • private equity;
  • commodities;
  • derivatives;
  • catastrophe bonds (only in some superannuation funds);
  • serviced strata schemes;
  • distressed debt;
  • emerging market debt; and
  • other assets including art, thoroughbreds, ostriches, films.

Yeah I saw Ostriches there too. I need to find out if you can invest in Flamingos.

Each of the newer investment categories on the market, many of which are listed above, have their own performance characteristics and carry asset-particular risks for investors. Thorough research should always be undertaken to ensure that alternative investments offer attractive returns with acceptable risks.

Ultimately, they should only make up a small percentage of a client’s portfolio, no matter how attractive they may appear or how aggressive a client’s risk profile may be.

Good Grief this Topic is long and there’s a lot to digest. Here’s a gif for getting this far. Coincidentally its how I feel about this subject.

Multi-Manager Funds or Fund of Funds:

This one just sounds ludicrous… Fund of Funds. Whomever came up with that was a moron. It’s like Fund Inception. So I as an investor pop my hard earned dollars into a fund, the Fund Manager of said Fund, then invests that capital in other Fund Managers Funds as long as they are independent of the RE of the Fund I Invested in ensuring no conflict of interest and can be done into single or multi sector funds. See below diagram, hopefully that explains it better than I can.

Fund Inception

Managers of multi-manager funds typically promote their ability to select underlying funds of above average expected performance, to exploit market opportunities and to take advantage of investment manager diversification.

Feeder Funds:

When I think Feeder Funds I think of Feeder Schools for the local rugby team. Turns out that’s basically it. So we have feeder schools in Brisbane for both Rugby Union and Rugby League. So they train the kids up and send them to the relevant camps etc with a view to improve them enough to play A-Grade. Same sort of principle applies here. We have a Retail Fund, that you or I can invest in, that money is then taken by the RE and invested into its own Wholesale Fund, which then gains exposure to its investments into the Securities market.

Ok kids, lets leave this here, there will be a part three. We will look at the following in the next instalment:

  • Other Investment Schemes;
  • Investment Platforms; and
  • Costs of Managed Investments.

So please stay tuned, here’s another gif. Aptly describing how I feel today.


Topic 4 – Managed Investment Structures – Part One

This should be a delight. Consider this your warning, Funds are not structured in the easiest fashion to understand or we would all be fund managers.

There are several different product structures used in the managed funds industry, which enable a variety of different offerings and services to be made available to clients. The underlying principle of the structures — the pooling of investors’ money for the purpose of investment — is identical. However, different regulatory and taxation guidelines create significant differences for industry participants and investors.

Investor directed portfolio services (IDPSs) are often referred to as ‘platforms’. There are a number of different platform types, including master trusts and wrap accounts. Individually managed accounts (IMAs) and separately managed accounts (SMAs) are also specialised types of platforms that are gaining some traction.

Investment Options:

So investors can invest in two options, broadly speaking either a single sector or asset class fund or a multi sector/asset class fund. This is a basic, and very easy way of looking at the funds, they’re either single or multiple, which thankfully is very straightforward.

There is however also an “Alternative Investments” usually sitting in a class of its own. Generally, these types of assets have limited investment history, commonly found in institutional portfolios rather than retail, distinctly different features than traditional asset classes and requires specialist skills to manage. Examples of alternative investments include hedge funds, infrastructure, private equity and commodities.

Single Sector/Asset Class Funds:

Single Sector Funds do as the name suggests and invest the majority of their capital into assets in one major class or a sector within an asset class for example cash, bonds, property or equities.

Cash Funds:

Commonly referred to as Cash Management Accounts or Trusts, these types of funds pool the investor capital into wholesale short term money market instruments such as cash, bank bills, treasury notes, and promissory notes. This is with the aim to provide investors with better returns than your standard savings account at your bank. Let’s face it the bank is the worst place to invest your money because they offer diddly squat in interest and you may as well set your money on fire.

A CMA however will not pool funds, and you would have an individual account. In Australia, after the GFC, the Government guaranteed investments in CMAs but not CMTs because a CMT is a trust rather than a deposit account.

Bond and Fixed Interest Funds:

Also known as Fixed Interest Funds tend to invest primarily in longer term fixed interest securities, generally with a maturity date greater than 12 months. Some will also hold shorter term securities as well. The longer the term with FIFs the higher the risks to the investor and therefore the higher the expected returns for that risk. This means that FIFs provide better returns than CMAs in most cases.

The FIFs can also be split into two categories, Domestic and International. There are also Diversified FIFs which will invest in both domestic and international markets as well. Over the past few years, we have also seen the advent of ‘unconstrained bond funds’, which have even fewer limitations as to how they can invest (they might invest internationally, in high yield or ‘short’ securities as they deem appropriate). Both of these types of funds have become very popular over the past few years.

Australian Fixed Interest Funds:

Results in these types of funds usually come from coupon or interest payments or realised capital earned through trading of securities. Securities available in the Australian Credit Market:

  • Commonwealth Government Securities;
  • Semi-government securities; and
  • Corporate Securities.

These increase with risk and therefore yield as you go down the list with Commonwealth Government Securities being the most secure and least risky.

International Fixed Interest Funds:

International fixed interest fund returns have a further dimension for returns —currency movements. Because international fixed interest funds invest in foreign securities, an Australian investor may have to carry the fluctuations in the value of the Australian dollar against other currencies, such as the US dollar, the euro, British pound or Japanese yen.

Funds can eliminate currency risk by hedging currency through the derivatives markets. This process can lock in an exchange rate, eliminating the effect of currency movements and resulting in a fund being fully hedged against adverse currency exposure. Funds that do not hedge this risk are known as ‘unhedged funds’. Some funds can be partially hedged, where the amount of currency risk managed is unique to the fund. Others funds will have active currency management, where the degree of hedging changes as the manager deems appropriate.

The volatility of unhedged bond funds can be considerably higher than that of hedged funds. Given this, the majority of international fixed interest funds on offer tend to have their foreign currency exposure hedged back into Australian dollars.

Mortgage Funds:

Mortgage Funds were popular until the GFC, and were generally used as an income stream and to meet asset allocation requirements for the fixed interest sector. Investors in these funds, invest in the debt used to fund property purchases and of course when the market crashed in 2008/2009 and property prices plummeted, the debt was no longer coverable by the equity in the property and a number of funds, if not all, had to suspend redemptions due to a lack of liquidity.

Many of the higher risk mortgage funds, which provided higher returns to investors by lending to property developers or riskier lenders, experienced high levels of default. This also led to fund wind-ups and significant losses for investors. Many companies offering these types of funds have gone into liquidation.

Mortgage funds usually invest in mortgages secured over residential or commercial properties, generally for periods of three to five years. The amount of interest charged by a fund reflects the risk, term of the borrowing period and market interest rates at the time the loan is made.

The interest that borrowers pay on their mortgages is passed to the unitholders of the fund (after fees and expenses) as income distributions. This is similar to how a CMT operates. Losses from default are borne by the investors, subject to any ‘first loss’ provisions that might be carried by the issuer.

Currently, there are few mortgage funds open for investment, however, this sector is again growing in popularity driven by interest rates at record lows. ASIC has developed benchmarks for assessing and managing risk for investors, they can be found here.

Property Funds:

This is what I work with all day. Working in the Funds Management team of a global property company, this is my jam.


Pretty straightforward, these funds invest into non-residential real estate which gives investors exposure to an asset class they normally wouldn’t have unless they had upwards of 50 million dollars at their disposal. There are four main types of Property Funds, and yes I have seen them all.

Australian Real Estate Investment Trust (A-REIT):

REITs are popular around the world and generally the prefix is to do with the country the property is located in. These funds are listed on the ASX and as such trade like securities. Their income and capital gains comes from buying, holding and then selling properties for a profit.

A-REITs are not property developers. Property developers tend to generate most of their profits from the development of property. These profits may or may not be linked with the property cycle. For this reason, A-REITs are considered property investment for the purposes of asset allocation, while property developers are not.

A-REITs offer investors a number of benefits, including access to direct property, transparency, liquidity, quality of property, diversification, valuation, and low transaction costs.

A-REITs have been extremely popular with investors, primarily because of the benefits outlined above. The Australian property market is the most securitised in the world, with well over half of all investment-grade buildings owned by a fund or syndicate. This means that there are increasingly scarce investment opportunities for Australian-based property funds in Australia.

Property Securities Funds:

are generally unlisted managed funds which invest in REITs. Australian investors generally access A-REIT exposure though managed funds, where fund managers will provide a broad portfolio of A-REITs.

Global property funds, which invest in REITs listed all over the world, also enjoy some degree of acceptance in Australian investors’ portfolios. These funds also performed extremely poorly during the GFC and suffered even further due to the slump in US housing.

Investors and their advisers need to take care that they understand the nature of what they are investing in, including the mix of equity and debt capital being employed. Simply investing in ‘property’ may bring an undesirably high level of leverage through the particular vehicle invested in.

Property Syndicates:

Property Syndicates are the funds that have a single property or a set that were purchased at the same time, but are not open ended so have a fixed amount of units and therefore a fixed amount of capital that can be raised. Syndicates also have limited to no liquidity so investors are locked into a period, generally between five and 10 years.

Property syndicates can offer high returns and taxation shelters during the life of the investment (and a capital gains tax (CGT) liability at syndicate wind-up). However, investors must understand that this is an illiquid form of property investment and they have little chance of realising cash on the investment until the investment term is complete.

Unlisted Property Trusts:

The main difference between Property Syndicates and Unlisted Property Trusts is that the Trusts are generally open ended and so can continue purchasing more assets if the capital from Investors is available.

Unlisted Property Trusts also have more liquidity, and the unit price is determined not by the NTA but the Net Asset Value (NAV) of the fund.

Australian Share Funds:

Australian share funds provide investors with the opportunity to gain exposure to the Australian sharemarket. The advantage for the individual stockmarket investor is in the diversification a domestic share fund can offer. Instead of owning shares in only one or two companies, the effect is to invest in a spread of companies with just a few thousand dollars, therefore reducing risks. It can also reduce the time required for investors to manage their investment portfolio, as they do not have to worry about dividends and paperwork associated with each company holding.

Examples include:

Large Cap Small Cap Blue Chip Share Funds
Industrial Share Funds Resource Share Funds Income Funds
Index Funds Market Neutral Ethical Investment Funds

Many fund managers have investment styles, which help to guide what type of companies they will invest in. Examples include:

  • value — managers predominantly invest in companies that have a low price relative to some fundamental variable (such as earnings or assets); and
  • growth — managers predominantly invest in fast-growing companies.

Australian share funds are generally towards the higher end of the risk–return scale as their underlying assets are company shares. However, each specialisation has its own risk–return characteristics as well. A blue-chip share fund is generally less volatile than an investment in a resource share fund due to the lesser volatility of the underlying shares.

Most funds aim to outperform the broad market index, which is usually the S&P/ASX 300 Accumulation Index. However, some funds may aim to outperform subsets of the broader index, such as the S&P/ASX 200 Index or the S&P/ASX Small Ordinaries Index, depending on their investment mandate.

International Share Funds:

Traditionally, international share funds invest in developed markets (e.g. North America, Western Europe and Japan), while emerging market funds invest in companies listed on emerging market exchanges (primarily across Asia and South America, with some pockets in the Middle East, Eastern Europe and Africa). International funds are often called ‘global funds’. By convention, global funds include the home country of the investor. Thus, for an Australian investor, the difference between international and global is minor. The same cannot be said for a US-based investor because the US is such a large market.

Commonly, the indices for international/global investing are the Morgan Stanley Capital International (MSCI) World ex-Australia Index, or the MSCI World Index. International/global share funds may be grouped into similar investment styles as Australian share funds — value, growth and market neutral. Industry and geographically specific funds are also available. As with any international investment, these funds are subject to currency risk and different fund managers will treat currency risk in a different manner. They may hedge all currency (i.e. remove all exposure to currency movement), leave it unhedged or choose to manage currency actively in an attempt to reduce risk and/or enhance returns.

Emerging markets:

In recent years there has been increasing interest from investors in emerging markets. The common reason for investing in this type of investment is the expectation of higher returns than would be achieved from developed markets. However, with this expectation comes the risk of greater volatility.

An emerging market is characterised by an economy with low per-capita income, low levels of industrialisation and poorly developed capital markets. The number of investable emerging markets continues to grow. Examples of emerging markets include South America, Eastern Europe, Asia, Africa and the Mediterranean.

This chapter is a bit long and there is a lot to digest, also its Friday afternoon and I want to go home, but I’m not taking my book with me so we are splitting this chapter out.

This concludes Part One – See you soon for Part Two.

Topic 3 – Foundations of Managed Investments 

Ok so my exam is coming up, in fact it’s next Friday, so I figured I should probably open the book right?

So, for Securities, I didn’t pass my exam first go, I missed by one question, but I knew the questions so my boss decided I should give that information to the other two people in my team doing it. Of course they passed the exam first go. So that’s not happening again. Especially not when one of them didn’t even open her book until the day before. Right, now I got that off my chest, lets dive into the Foundations of Managed Investments.

What are Managed Investments?

A Managed Investment, or Managed Fund, is a group of pooled investments where ownership of the investments is in a fund that is then unitised and those units are owned by individual investors who otherwise would not have been able to purchase the investments.

ASIC defines it as below:

Managed investment schemes are also known as ‘managed funds’, ‘pooled investments’ or ‘collective investments’. Generally in a managed investment scheme:

  1. people are brought together to contribute money to get an interest in the scheme (‘interests’ in a scheme are a type of ‘financial product’ and are regulated by the Corporations Act 2001);
  2. money is pooled together with other investors (often many hundreds or thousands of investors) or used in a common enterprise;
  3. a ‘responsible entity’ operates the scheme. Investors do not have day to day control over the operation of the scheme.

MoneySmart, which is the ASIC consumer facing site defines as below:

In a managed fund, your money is pooled together with other investors. An investment manager then buys and sells shares or other assets on your behalf.

You are usually paid income or ‘distributions’ periodically. The value of your investment will rise or fall with the value of the underlying assets.

The investment manager may be called a ‘fund manager’ or ‘responsible entity’.

My study guide doesn’t actually define it.

Due to the nature of my work, I understand managed investments to be the financial products we have on offer. We have Managed Funds where the fund has purchased the asset, either stocks or property or both, and then we have investors who invest in the fund itself, allowing the fund to purchase the assets. The investors are then provided income through distributions or growth through the changes in Net Tangible Assets (NTA) or unit price. Remember my blog on the difference between Growth and Income, if not you can read it here.

To relate it to me, my investing in Acorns AU is investing in a type of managed investment called an ETF. In other words, Managed Funds are financial investment vehicles, where the investor is not managing the investment directly.

What some of you may not know, is that if you have a Superannuation Fund, Pension Fund, Retirement Plan, 401(k) or IRA, you essentially have a Managed Investment. Unless you have a Self-Managed Super Fund, you have what we call a Retail Superfund/Retirement Plan. Usually run by a Responsible Entity or Fund Manager who manages the investment based on your requests.


I have my superannuation in an Industry Super Fund. I set the profile according to my strategy for growth. So I instructed my Fund Manager to invest that money on my behalf in whatever funds they chose with a strategy that something like 60% would be in aggressive growth products and the rest is split across conservative/less risky saving measures.

Apparently, Australia is the third largest superannuation market in the world behind the US and the UK with AUD$2.1 Trillion under management. That’s about USD$1.5 Trillion and 1.4 and 1.2 Euro & British Pound respectively. That’s a hell of a lot of money and anyone that wants to put that in my bank account can just go ahead.

Investor Markets

We have four different types of Investors in Australia and as I’ve experienced, these names don’t necessarily translate across internationally, so I will try as best I can to explain without confusing you too much.


These are the mums and dads. They don’t have a financial advisor, and they rarely have more than 500k to invest. I deal with these types of investors every day.


Mezzanine Investors are slightly savvy and are sometimes referred to a Private Wealth clients and generally have over 250k to invest. They are also more likely to have a Self-Managed Super Fund or Trust system in place to manage their money.

Wholesale or Institutional:

These are the big boys. These are the ones who invest more 500k at a time. Often these are companies. My Superannuation manager as mentioned above is a Wholesale or Institutional Investor. It pools the Super invested in it, and invests it in large portions rather than smaller individual ones. There is also what we call Platforms. So big banks have investing platforms that their Advisors can invest their clients’ money into different funds through one central platform. So the investment is held in the platform’s name and it then feeds out the distributions when they are paid depending on whether the investors who use the platform want their distributions reinvested or paid out. Platforms are also a way of gaining exposure to closed funds.


Mandate Investors I don’t get to see very often. Mandates are usually provided by large institutional wealth holders. Think the likes of Goldman Sachs, Rothschilds, JP Morgan, basically anyone that can put out a mandate for $5 million or so. I recently had a run in with a $10 million mandate from a financial institution, thankfully I didn’t have to invest it wisely or anything.

When classifying funds, the same sorts of principles also apply.

The most comment type of Managed Investment in Australia is the Managed Trust. This is what I work with every day. We have Managed Trusts where unitholders (Investors) purchase units in the Trust which works in a similar way to purchasing shares in a company. The investors technically own the assets of the Trust as a group and their percentage of the distributions or income is determined by the number of units they hold.

This creates their holding in a percentage. Generally, a unit price is established and then this is used to determine the amount paid per unit and also if anyone wants to exit the Trust, it determines their selling price.

There are two types of these funds:


Open ended funds will continue to create units in the trust and cancel accordingly. These funds generally cover multiple assets and being open ended allow for further asset purchases depending on the popularity of the fund.


Closed ended funds have a finite amount of units available and once the allocation is exhausted, unitholders are unable to purchase more units in the Trust, reinvest their dividends and generally cannot exit without finding a purchaser for the units. These types of funds will generally have one asset, although may have multiple depending on the manager, but cannot purchase more assets.

Income Equation

These funds are run by Responsible Entity’s or RE’s, I work for an RE. RE’s must operate in the best interest of the Investor’s in the fund and there are severe penalties for any mismanagement or dodgy practices.

These kinds of financial vehicles are often also tax free, whilst the investor remains in the fund. Capital Gains/Loss comes into play if they sell out. Open funds also generally offer high liquidity whereas the closed ones provide lower levels of liquidity with some not providing liquidity at all for a fixed term. These funds are also generally unlisted funds so they don’t find themselves listed on the stock exchange.

There are however also Listed Managed Investments which are the same principle however they are listed on the Stock Exchange. Most commonly these are REITs (Real Estate Investment Trusts), ETFs, and in recent times mFunds. The ASX offers a settlement service so that investors can invest in unlisted managed funds similar to the way they would invest in shares on market, this is what mFunds facilitates.

The key difference between listed and unlisted is how the tradeable price is calculated. In an unlisted fund, this is simply the Net Tangible Asset or NTA, where as a Listed fund is influenced by supply and demand. Except ETFs, which generally trade at or very close to the NTA.


Insurance Bonds are also considered a Managed Investment. From what I understand, if you have some cash you don’t need for 10 years, invest it here. You can’t touch it, receive no income, but pay tax at the company rate which is an advantage for those in higher wage brackets. After the 10 years, you get your principal amount, plus all reinvested funds and it’s all tax free. Seems like an awesome idea, but I have trouble keeping money in one spot for very long so this one wouldn’t be for me unless I wouldn’t miss the money.

Separately Managed Accounts are also on the rise, these are not considered a fund under the Corporations Act, but are transparent in terms of investment and tax than your typical managed funds. In this case the Investor can see what the underlying assets of the SMA are, but has no input into what is invested in. Kind of like a read only version of an investment. You can see but you can’t make changes. SMAs are also best suited to equity assets rather than other asset classes, due to their makeup and administration.

There are also Individually Managed Accounts, similar to SMAs but for individuals and usually high net wealth individuals at that. IMAs allow complete customisation to suit the needs of that investor and this is the primary difference between SMAs and IMAs.

There are a number of structural differences between managed investments and direct investments that investors should be aware of. To illustrate, compare a managed investment and an ASX-listed company.

Differences include:

  • Managed investments may have a limited life (usually 80 years), whereas companies have perpetual succession and continue until wound up or liquidated.
  • Unlisted managed investments have specific buyback arrangements to accommodate redemptions, whereas investors usually sell company shares on an exchange to other investors. Companies may sometimes offer a share buyback arrangement (e.g. redeemable preference shares) for various reasons, but this is usually not the primary way an investor would liquidate a listed investment.
  • A managed investment is not required to hold general meetings unless a proposed change to the constitution or trust deed materially affects the majority of unitholders, while a company must hold annual general meetings.
  • Company directors determine when and how much of a company’s profit is paid to shareholders as dividends on a regular basis, while an RE/trustee of a managed investment determines how often income is to be paid to unitholders when designing the trust and developing the constitution and offer documents (prior to receiving investments). The RE/trustee must pay all distributable income received or generated by the fund to unitholders by the end of each financial year to retain the tax-free structure.
  • Unlisted liquid managed investments may issue and redeem units, as demand requires. The issue of new shares by a company, however, may be difficult and costly.

We also now have the Managed Investments Act 1998 (Cth) which was instrumental in changing the structure of unit trusts in Australia. Prior to the Managed Investments Act coming into force, a unit trust was comparable to other trusts, such as family trusts, and was governed by a trust deed. After the failure of some unit trusts in the early 1990s, notably Estate Mortgage and AustWide, it became clear that the split of responsibilities between a fund manager and trustee left unitholders vulnerable to the fund manager and trustee diverting management responsibilities to each other. To address this problem, the Managed Investments Act replaced the fund manager and trustee of a unit trust with a single responsible entity (SRE) or RE. The RE therefore became accountable for all aspects of the trusts operation, including the performance of the trust and its administration.

Managed Investment Structure:



Investment in the Australian market has grown considerably after the GFC and continues on an accelerated trajectory. As with each new and exciting project the industry isn’t looking to create the most outlandish product to wow the masses, they are however competing for a certain pool of funds and often the trends are split by age brackets and social circumstances.

For example, retirees will look predominately at the Income sector as a way to finance their retirement and later years, where as the younger generation having a longer time frame to invest may look more so at the Growth funds and equities as they have the time to wear risk. Movies like “The Wolf of Wall Street” may have also accelerated the interest of people into the Financial Sector.

Update: Acorns AU


I received a princely 49c today. I don’t care what you say, that’s cool.

You may have seen from previous posts that after my Securities subject for the RG146 I took an interest in trading on the stock market and started an account with the app Acorns AU. I had watched it move down over the last few weeks and saw a swift change when Trump struck Syria. However, over the last few days it has picked back up again and I’m trading on a gain. 

It’s not a big gain, but from my original investment of $150 which has been typically sitting at a dollar or so behind what I invested, that’s pretty damn cool. 

The next best part is that in addition to this free money in the form of dividends, I can also use my favourite retailers to earn top ups. So I could go and buy that dress from ASOS and whatever the difference to the next dollar is, they’ll put 5x that into my Acorns account. Not bad aye?

 So I’m pretty chuffed with myself. 

Now, I’m not a financial advisor and I’m literally someone who is just having a play. My circumstances are vastly different to yours and this app will not make you rich. Having said that, if you’re keen to give it a go, click the picture below or here, for free $2.50 when you sign up. 

Full disclosure, I also get $2.50 when you’re account is approved. 

Good luck


I haven’t forgotten…

So lots of things have been happening in my world.

This beast of a textbook has been taking a lot of my time. 

Once I have it out of the way, possibly also some other stuff it’s time for Managed Investments.

I promise. 

Test that Theory: Acorns AU

I have had this app for about six months after seeing an article written about it. I’d done nothing with it until tonight. Now that I’ve set it up, I decided to turn my experience into content. Presenting Acorns AU:

Acorns is an American company that branched out into the Australian market in 2016. You can find the Product Disclosure Statement here.

So what is the Acorns app?

The app allows the user to invest their small change in the stock market and build a portfolio. According to their site, the construct and optimise 5 diversified portfolios with help from Nobel Prize winning economist Dr Harry Markowitz.

The portfolios are constructed using ETFs on the Australian Stock Exchange and basically depending on your chosen portfolio invests a percentage of the money you transfer into each category on your behalf. Hopefully, this grows your portfolio to the point you can then withdraw the funds and invest on your own or continue to grow the portfolio.

An ETF is an Exchange Traded Fund which is a type of fund that owns the underlying assets (shares of stock, bonds, oil futures, gold bars, foreign currency, etc.) and divides ownership of those assets into shares.  So kind of like a an investment trust where a bunch of people pool their money together to buy an asset, an ETF owns all of the assets and the bunch of people invest into the ETF. Often these are called Investment Vehicles, so don’t be surprised if I change the terminology slightly.

How does it work:

Once you’ve signed up, including a small identity check to comply with ASIC regulations, you’re asked to link a bank account. This bank account is your spending account and the app monitors how often you spend, only so that it can round up your purchases and invest the change. For example buying a coffee might be $3.40 and so Acorns would take the 60c to round it up to $4 and add it to your investment account. You can then also set up a funding account to either initially transfer funds to get your portfolio started or set up a daily/weekly/monthly top up.

You can also choose from 5 different portfolio types:

  1. Conservative;
  2. Moderately Conservative;
  3. Moderate;
  4. Moderately Aggressive; and
  5. Aggressive.

Each portfolio weights different cap stocks for your portfolio and invests accordingly. These weightings are based on risk.

So a Conservative portfolio has a higher weighting in Australian Corporate Bonds, Money Market and Government Bonds and less in the Large Cap stocks in Australia and overseas. These are then on a sliding scale across the portfolios and start to form opposite weightings in the Aggressive portfolio. As we learnt recently, the more agreesive the portfolio, the more risk and in turn the larger the expected returns.

The choice of portfolio is up to you and you can change at any time, although a warning does pop up, as changing your portfolio will change the outcomes and frequent changes can cause a lot of issues.

You’re also able to make voluntary Superannuation payments from the account, when you withdraw. It’s not an automatic set up. There is even an option to earn extra top ups by shopping with partnered retailers like CottonOn, Nike or Dan Murphy’s.

In the News:

Simply because it’s innovative and new, Acorns AU has featured in the news and of course it’s not all positive. So as with anything you do, research is key. What may work for me wand what I am comfortable with, may be the complete opposite for you.

There is an article in the Australian Financial Review, which you can read here and another here.

Final Thoughts:

I like the simplicity the app offers an otherwise complicated process. Given I’m still waiting for my account to be approved, it’s still a work in progress and that’s all I really have to say at the moment. Keep your eyes peeled for an update.

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