The key to managing investment risk, writes Campbell Korff from Yellow Brick Road, is to identify an appropriate investment strategy – and not to tar all mangement funds with the same brush.
Since the global financial crisis, I’ve found many investors in the Northern Rivers very reluctant to consider any investment via a managed fund, regardless of the underlying investment strategy and level of risk. While this is understandable given the difficulties many investors have faced redeeming their investments from mortgage funds, with others forced to freeze redemptions in the aftermath of the Global Financial Crisis, it’s really not rational.
A Managed Investment Trust, to use the technical term, is simply a legal structure used by investment managers to hold assets which they have invested in according to the mandate, or investment strategy, given to them by their investors. So to tar all managed funds with the same brush, is like saying BHP Billiton is a bad company because many companies became bankrupt following the GFC. Obviously, the quality of BHP’s management and business assets got it through the GFC and the same is true of the managed funds that survived.
Many of the funds that didn’t survive may have simply been pursuing high-risk investment strategies to start with, in which case investors got what they paid for; so long as they received proper advice when investing (which, unfortunately, many did not).
Managed funds offer many benefits, such as: greater diversification, professional management, advantages of scale and ease of administration. The sum of which should achieve better long-term net returns than you could investing in the same way yourself. However, this comes at a cost in the form of management and performance fees. These fees should reflect the complexity of the fund’s strategy and long-term performance, which you should always compare net of fees.
They also come with particular risks – principally, manager and liquidity risk. Just like businesses, if management is incompetent or dishonest, funds will fail. Also, redeeming capital from a fund relies on there being sufficient cash available to repay investors. If many investors ask for their money back at once, which is what happened in many cases during the GFC, there may not be enough cash assets available to repay them without damaging the position of all investors, forcing managers to freeze redemptions. This is liquidity risk.
The key to managing these risks is carefully identifying an investment strategy which is appropriate for you, and, if a managed fund is the most efficient way to execute that strategy, finding a fund with a similar investment mandate and, importantly, a manager with a strong long-term track record in successfully executing that strategy. Your financial planner can help you develop your investment strategy and determine if a managed fund is appropriate for you.
If you would like more information on these issues, drop me an email at [email protected]. Or visit the YBR Ballina website on: ybr.com.au/Branches/Ballina
