Using managed funds to express your investment views
How investors might choose to use managed funds in their SMSF portfolio.
Managed funds are a popular investment vehicle for SMSFs as they allow investors to express a wide variety of investments views. But it’s important to be aware of some of the advantages and drawbacks of investing in managed funds through an SMSF before taking a decision to invest.
Let’s take a look at a simple example of how investors might choose to use managed funds in their SMSF portfolio.
In this case, one investor may have a view that company profits in the Asian region will do well, except for Japanese companies. This investor may find a managed fund that offers the ability to invest in a basket of Asian stocks, without giving the investor exposure to Japan.
In contrast, another investor may believe the Japanese share market is undervalued and find a managed fund with substantial exposure to Japanese companies to allow the investor to express this view.
There is an almost infinite variety of managed funds in which investors can take an interest. Damian Liddell, a financial adviser with Browell’s Financial Solutions, says SMSF investors who are using managed funds to affect their investment strategy firstly need to be aware of the impact managed fund fees will have on overall returns.
“If you're using managed funds and you're paying fund managers' fees, you want to be getting bang for your buck,” he advises.
This is especially the case when it comes to investing in more vanilla-style products such as Australian share funds. “You would generally use a managed fund if you’re looking for a product with a point-of-difference or for a way of investing you can’t replicate yourself,” he argues.
An example, says Liddell, is long-short funds. These are funds that allow the fund manager to take long positions in stocks, as well as short positions. Long positions involve buying stocks in the usual way on a share market, based on the view the value of the share market will rise. Short investing involves selling a parcel of shares and buying them back down the track at a lower value to make a profit.
“Let's say you hold a view the market is going to fall, or it is going to be a low-growth environment, which is topical at the moment. You might look to use a fund manager to take advantage of those trends. We’re also seeing investors buy shares to chase dividend yields, given the low-interest rate environment. They're really not paying attention to the risk of shares being expensive. There are a number of good funds that deliver income and capture that dividend for you, but also manage the downside. They use short positions that most people can't hold themselves, to capture the dividend and put a floor under any falling share.”
Investors would also typically use managed funds to gain exposure to international shares. He says some investors choose to use an exchange-traded product to get access to overseas markets, if they want a standard exposure.
But SMSF investors who want exposure to more complex products may choose a specialist managed fund. Liddell says any investors in international markets should also account for currency fluctuations, which can be tough to do as a retail investor, and much more easy to affect at a fund manager level.
Depending on the view the investor has on the direction of the currency in the market in which they want to invest, there is generally a hedged and unhedged option in any international managed fund.
Liddell says SMSF investors also often use managed funds to diversify into asset classes to which they can’t gain easy access such as commercial property and infrastructure. “You can never have enough diversification and managed funds are a good way to help achieve that.”
There’s a universe of managed funds available that allow investors to express a divergence of views. The idea is to form a view about how financial markets will perform, based on thorough research, then identify managed funds that allow you to express those views, ensuring that the investment helps the fund achieve its investment goals. It can be an incredibly rewarding process for SMSF investors who like to take a hands-on approach to their fund.