October 13, 2014

Investment Strategy: How to choose a managed fund

Managed funds offer an attractive way for investors to obtain exposure to an asset class that would be very difficult to access directly or in a diversified form. But how do you select one from the thousands on offer? Nick Ryder, NAB Private Wealth Investment Strategist, investigates.

For many investors, managed funds offer an attractive way to obtain exposure to a particular asset class that would be very difficult to access directly or to obtain in a diversified form.

Commercial property, international bonds, hedge funds and emerging markets shares are all examples which require scale. So, it makes sense to pay for a professional investment team to manage these funds for you and to pool your money with other like-minded investors to enjoy the benefits of scale.

But how do you select a managed fund from the thousands on offer in Australia and internationally?


When you’re buying an investment in a managed fund, you’re buying the investment skills of the investment team. On top of their experience and education, these skills can be influenced by how well the individuals work together as a team and how motivated they are to perform.

Fund research firms will often interview the entire investment team, obtain references and conduct background checks. They’ll sit-in on investment committee meetings to observe the team dynamic and form opinions on the calibre of the investment team. They’ll also look at staff turnover, succession planning and remuneration structures to ensure that the investment team is cohesive and their interests are aligned with investors in the fund.


The investment philosophy is how the investment team thinks about the markets in which they invest. For example, what is their investment style and do they think that markets are inefficient and that securities can become undervalued and overvalued at times? Do they perform in-house fundamental research and analysis or use other research tools and sources? What’s on their investment horizon, how do they seek to manage investment risks, how to they generate investment ideas and what’s their investment edge relative to competing investors?

Investment firms should be able to clearly articulate their investment philosophy and be able to demonstrate that they adhere to it. In this regard, fund research firms will often conduct analysis to ensure the fund manager is true to label and, for example, hasn’t engaged in “style drift” over time.


The investment process is the way that the investment firm sources and identifies investment opportunities, researches opportunities, decides to invest, decides how much to invest and then decides when to sell.


Past investment performance has very little predictive power as to future returns, so why is it relevant when assessing a managed fund? It’s useful to understand whether the investment manager has stayed true to label over time, has been good at managing risk in the portfolio and how the fund performed in different market environments.


The term ‘parentage’ captures the resources and financial backing of the investment firm. A lone investment manager working out of a garage may have less resources and future longevity compared with an investment firm that has significant capital. When looking at the parentage of the firm, larger ones aren’t necessarily better, but they come with a degree of confidence that they”ll have sufficient capital and resources to continue operating.


Questions about the product tend to be about the terms and conditions of the actual fund. How often can you buy units in the fund and how can you get out? What’s the minimum investment size, how often are distributions paid, and what is the tax status? Can the manager suspend redemptions? What investor protections are available? The answers to these questions are the same for many funds – there are industry standard terms and conditions, but it doesn’t hurt to read the fine print in the offer document.


While the management expenses of a fund shouldn’t be the sole basis for investing in it, the total or management expense ratio of the fund needs to be assessed relative to other competing funds and against the potential net returns the fund can earn. The structure of the fees can also be relevant to ensure that there’s strong alignment between the fund manager and investors, like through the use of performance fees, for example.


What attractive opportunities are in the pipeline for the asset class that the fund is investing in? Is the fund investing in an area where there are likely to be numerous investment opportunities over the short to medium term, or is everything in the sector overpriced, or is the flow of opportunities likely to dry up?

For further analysis, download the full report.