Managed Funds Explained: What Are You Actually Investing In?

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This is Part 1 of our Managed Funds Education Series, looking at how managed funds work and the role they can play within a broader investment portfolio.

Many Australians have money invested through managed funds, often through superannuation or an investment portfolio, without necessarily understanding what sits underneath them.

So what is a managed fund? What do you actually own? And why might an investor use one?

A managed fund pools money from many investors and invests that money according to a defined investment strategy.

For example, an Australian shares fund may hold shares across a range of Australian companies. A global shares fund may invest in businesses across different countries and industries. Other funds may invest in fixed interest, property, infrastructure or a combination of asset classes.

Investors generally purchase units in the fund.

The value of those units changes as the value of the underlying investments changes.

This means that while an investment statement may show just one managed fund, underneath that fund there could be dozens or hundreds of individual investments.

It is important to understand that the term “managed fund” describes the structure through which you invest. It does not tell you whether the underlying investments are conservative, aggressive, simple or complex.

Two managed funds can be completely different.

One may invest in large Australian companies. Another may specialise in smaller businesses. Another may invest globally, while another may focus on fixed interest securities.

The more useful questions are:

What does the fund invest in, how is it managed, and what role is it intended to play within the overall portfolio?

In an actively managed fund, professional investment managers make decisions about what the fund should own.

This can involve researching companies, analysing financial statements, meeting company management teams, assessing industries and deciding which investments should be included in the portfolio.

The manager also decides how much to invest in each holding and when an investment should be increased, reduced or sold.

Different managers can approach this task very differently.

Some may focus on finding companies they believe are undervalued. Others may look for businesses capable of producing strong long term growth. Some place greater emphasis on managing risk and limiting losses.

This is one reason selecting managed funds involves more than simply looking at recent performance.

We will look more closely at how professional fund managers invest in Part 2 of this series.

One of the main benefits is access to professional investment expertise.

A specialist investment manager may have a team of analysts researching companies, industries and markets every day. This can provide a level of research and oversight that would be difficult for many individual investors to replicate themselves.

Managed funds can also provide diversification.

Rather than relying heavily on a small number of individual investments, an investor can obtain exposure to a much broader portfolio.

However, diversification is not simply about owning more investments.

An investor could hold several managed funds that own similar companies or follow similar investment styles. While there may be many individual holdings underneath, the portfolio may still behave in a similar way when market conditions change.

Thoughtful portfolio construction therefore involves looking not only at what each fund owns, but also at how different investment managers complement each other. This becomes particularly important when considering diversification across investment styles and how a portfolio may behave during periods of market stress.

Professional management does not remove investment risk.

A managed fund investing in shares can fall when share markets decline. International investments may be affected by currency movements. Fixed interest investments can be influenced by interest rates and credit conditions.

There are also risks associated with the investment manager itself.

Investment teams can change. Investment processes can evolve. Organisations can be bought or restructured. A fund that once fitted well within a portfolio may become less suitable over time.

This is why managed funds should not simply be selected once and then ignored.

They need to continue performing the role for which they were originally chosen.

Perhaps the most important point is that a managed fund should not be considered in isolation.

Before selecting investments, there are broader questions to answer.

What is the money for?

When might it be needed?

How much investment risk is appropriate?

How much liquidity is required?

What other assets does the investor already own?

For business owners, this can be particularly relevant.

A large proportion of their wealth may already be concentrated in their business, commercial property or other assets connected to the same economic environment.

For someone approaching retirement, the considerations may be different again. Their investments may soon need to support regular withdrawals, making the balance between growth, liquidity and risk increasingly important. Investment risk can also feel very different as retirement approaches, as the timeframe shortens and the portfolio takes on a greater role in supporting future lifestyle needs.

The investment portfolio should therefore sit within the broader financial strategy, rather than being considered separately from it. Ultimately, investments are one part of the bigger question of whether your overall financial position is on track to support the outcomes you are working towards.

Managed funds can provide access to professional investment management, diversification and specialist expertise across different markets and asset classes.

But the fund itself is only one part of the decision.

What matters is understanding what the fund is trying to achieve, how it is managed, the risks involved and how it fits alongside the other investments within the portfolio.

This shifts the focus away from simply asking:

“Which fund performed best last year?”

towards a more useful question:

“What role is this investment expected to play within my overall financial strategy?”

In Part 2 of our Managed Funds Education Series, we will look more closely at how professional fund managers invest your money, including the research, people and investment philosophies behind their decisions.

Paul Tamaschke

Principal Financial Adviser, Smart Wealth Financial  

If this article has prompted questions about your own position, you are welcome to make an enquiry.

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Important information

The information in this article is general in nature and has been prepared without taking into account your objectives, financial situation or needs. Before acting on any information, you should consider whether it is appropriate to your circumstances and seek personal financial advice where appropriate. If the information relates to a particular financial product, you should obtain and consider the relevant Product Disclosure Statement before making a decision.