HOW FUND MANAGERS HELP TO GROW YOUR WEALTH
Funds management is the professional management of a pool of assets by an investment specialist known as a fund manager. This is generally on behalf of superannuation funds, insurance funds or individual investors such as Self Managed Super Funds (SMSFs).
The history of pooled assets (or managed investments), dates back to 1774 with the creation of a Dutch investment trust as it was believed by providing diversification it would increase the appeal and access for smaller investors with minimum capital.
How right they were, as managed funds and the management of these assets have become a means for investors of all sizes to access professionally managed investments.
Today the asset management industry is entrusted with over $100 trillion for retail and institutional clients globally. That is equivalent to 100% of the world gross domestic product (GDP) and 40% of global financial assets.
What do fund managers do?
Fund managers are investment professionals who are entrusted to invest and manage financial assets on a client’s behalf. Financial assets include stocks (shares), bonds, property and cash.
People invest money with fund managers to help them meet their financial goals and objectives. As examples: ensuring you have sufficient money in your retirement; saving for that special holiday overseas or purchasing a new car; or to ensure you have enough money to look after your family in the future.
Using a fund manager either directly or through your superannuation fund gives you numerous benefits including:
1. Professional management of your superannuation or investment portfolio: access to professional investment specialists – these experts have the knowledge and skills relating to funds management as well as the time required to research markets, economies and companies.
2. Access to a wider range of asset classes: that individuals may find difficult to access themselves. For example, global equities (shares), emerging markets, property, alternatives or infrastructure. You can invest into managed funds which in turn invest in these asset classes on your behalf.
3. Diversification of your superannuation or investment portfolio: Fund managers help diversify your investments, aiming to reduce volatility of returns. This is achieved by pooling your investment with other investors in a managed fund. This allows the fund manager to invest in a wider range of securities than if you invested directly.
4. Greater access to company research and insights: Fund managers have access to research to help make informed decisions. As they represent large investors in individual stocks, they can gain access to senior
management in companies and positively influence business decisions affecting your investment.
5. Fund managers are continually managing your investment: Fund managers are always monitoring portfolios so they can assess breaking news as it happens. Even when you are on holidays they are managing your investment. This could be reacting to a surprise change in interest rates to deciding on whether to participate in a rights issue.
6. Administration and paperwork: Owning one investment can generate a lot of paperwork, owning a portfolio of investments will multiply the paperwork. Fund managers take care of all the paperwork for the many investments they make and just send you a consolidated report.
7. Rebalancing your portfolio: In addition to selecting appropriate investments, fund managers also make sure the amount invested in any one investment stays consistent with the objective of the portfolio. This requires regular rebalancing, reducing exposure to investments that have done well or adding to those that may have underperformed in the short term.
How do fund managers help to grow your wealth?
Most Australian workers are required to contribute superannuation into an authorised superannuation fund. Superannuation funds will professionally manage funds for their members and/or outsource some or all of this money to external fund managers to invest and manage on behalf of their members.
The fund managers will invest this money in multiple asset classes and through various investment strategies, as determined by the superannuation fund. These asset classes include Australian and offshore shares, property, fixed income (bonds) and alternative assets such as hedge funds, infrastructure and private equity. This diversification helps lower volatility and maximise returns. The fund manager will invest in the way that is mandated by the super fund. Superannuation funds have a fiduciary duty to allocate resources to benefit their members. Your risk profile and life stage may be taken into account depending on which strategy you belong to. For example, you may be in a balanced fund for someone in their 40’s. The assets for this fund will be very well diversified, include many asset classes, have more growth assets to focus on higher growth. On the other hand a person in their 60’s may have more income assets in their portfolio to focus on yield/income.
2. Self-Managed Super Fund (SMSF)
If you run your superannuation through an SMSF, investing into a managed fund run by a fund manager can provide you with the following benefits:
a. Diversification of your portfolio;
b. Professional management of your superannuation; c. Access to company research and insights;
d. Access to a wider range of asset classes;
e. Continual management of your portfolio;
f. Administration and paperwork taken care of; and
g. Rebalancing of your portfolio if required.
3. Non-superannuation investments - investing directly with a fund manager
You can also directly invest into a managed fund in order to grow your savings and investment for future goals, outside of your superannuation.
The benefits of diversification
Diversifying your portfolio and holding investments over the long term reduces risk and volatility, meaning negative returns are minimised.
Spreading investments across multiple asset classes reduces the overall risk of an investment portfolio. This is because losses made in one asset class can be offset by gains in others. The diversified portfolio is typically neither the worst nor the best performing investment in any given year. As a result, the overall return is less volatile.
A ‘balanced’ portfolio’s returns over rolling 10-year periods show no periods of negative returns and are significantly less volatile compared with shorter term horizons. The less volatile return profile enables investors to see past the haze of short-term market movements and focus on achieving long-term investment goals. Speak to our team about diversity.