Strategy: investment timing and analysis

Understanding the structure of different investment options is key to choosing what’s right for your objectives and risk profile. Sally Campbell from JBWere, explains the benefits of the main types of product you can include in your portfolio.

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Strategy: Different investment structures – is anyone else confused?

LICs, ETFs, SMAs, ETPs, mFunds, unit trusts… I thought professionally managed products were introduced to make investing simple for private investors. Is anyone else confused by the ever increasing array of investment structures now available?  Well if you are, you are not alone.

I prepare a monthly update on listed managed investments and when I started preparing the document in late 2014 I included a section titled “New News” where we discuss any new ETFs, LICs or ETPs that listed during the month.  Initially, I thought this would be short-lived because not many new products come out each month.  In reality, there has been no shortage since then.

As investors, it is important to be able to differentiate investment structures so that you are aware of their characteristics and can identify which is most appropriate for your portfolio.

Unit Trusts

Often referred to as managed funds, unit trusts have been the core investment structure of the Australian market for many years now.

  1. Unit trusts have the largest product range and have enjoyed the most support within the Australian market.   There are over 3,200 unit trusts in the Morningstar Australia managed funds database.
  2. As a trust, these structures do not pay tax and are required to distribute all of the earnings in the year they are generated.
  3. Distributions vary in both the size and make-up (mix of realised capital gains and income) from year to year.

Examples include: WaveStone Australian Share Fund and Zurich Global Growth Fund.

Listed Investment Companies (LICs)

LICs also have a long track record and have been well supported over the years.

  1. As their name implies, LICs are listed on the stock market and can be traded throughout the day.
  2. LICs are companies, therefore do pay tax at the company tax rate and can also distribute dividends (often fully franked) to shareholders.  The company structure also ensures LICs can retain earnings, which can allow the company to smooth dividends over time.
  3. LICs can and do trade at a premium or discount to the underlying value of the portfolio.

Examples include: Magellan Global Equity Fund (MGE), BetaShares Australian Equities Bear Fund (BEAR)

Exchange Traded Funds (ETFs)

Interest in ETFs has increased over the last five years.

  1. ETFs are also listed on the stock market and can be traded throughout the day.
  2. But in contrast to LICs, ETFs are unit trust structures so there is no ability to retain earnings.
  3. ETF managers appoint market makers to ensure ETFs trade in line with the underlying value of the portfolio. Therefore, we don’t see the significant premium/discounts on ETFs that we can see in some LICs over time.

Examples include: iShares S&P 500 (IVV), SPDR S&P/ASX 200 Fund (STW).

Exchange Traded Products (ETPs)

ETP is a term used for a range of listed investments:

  1. It is most often used to refer to listed unit trusts that are not traditional passive ETFs, including the newly listed actively-managed ETFs.
  2. Once again, there can be considerable volatility in distributions from year to year.

 mFunds

mFunds are unlisted managed funds available for settlement under the ASX Operating Rules and through the mFund Settlement Service.

  1. Once again mFunds are unit trusts.
  2. The difference here is that they are traded through the mFund Settlement Service.
  3. mFunds are traded daily, but not throughout the day as is the case of LICs, ETFs and ETPs.

Examples include: Aberdeen Asian Opportunities Fund, Bennelong ex 20 Australian Equities Fund.

Separately Managed Accounts (SMAs)

SMAs are direct stock/bond/hybrid portfolios managed on a discretionary basis.

  1. Investors maintain beneficial ownership of the underlying securities.
  2. Investors have full transparency of the underlying portfolio.
  3. Capital gains outcomes are not pooled.

Examples include: JBWere Growth Portfolio, JBWere Fixed Income Portfolio.

As I have highlighted, there are advantages to each structure.  This summary will help guide you towards the most appropriate structures for your portfolio and objectives within your risk profile.  Please contact your adviser for more information.

By Sally Campbell, JBWere