Tutorial Question for Module 6 Managed Funds PDF

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Financial Planning in Australia: Advice and Wealth Management , 8th edition by Sharon Taylor and Roger Juchau Questions with guided solutions updated for this edition by Roger Juchau © 2018 Reed International Books Australia Pty Limited. Materials available in this system are protected by copyright and are operated by Reed International Books Australia Pty Limited, trading as LexisNexis, or its affiliated companies ("LexisNexis"). All rights reserved.

Questions 1. entry fees only concern investors in unlisted funds 2. performance fee and ongoing fee for most managed funds 3. management expense ratio (MER) = (management fees + all other related costs)/ Learning point 3 : Regulations MIS (managed investment scheme) : managed funds or unit trust for investment purpose a. these unit trusts allocate their profit to all unit holder, and each holders pays their income tax individually b. ASIC is responsible for supervising these funds Superannuation funds The priority of superannuation funds is not to grow so aggressively. It is the most important part in managed fund industry Investment return within your super will be taxed at 15% and long term capital gain will be taxed at 10% (more than 12 months held) APRA (Australian Prudential Regulation Association) is responsible for regulating Super

Master trust and wrap account Two investment platforms/vehicles 1. Master trust collects fund from investors (pooled fund) and then using them to make investments. A portfolio manager will manage the assets in a master trust 2. Wrap accounts allows an individual investor to combine all of investments (managed fund, shares, bonds, super, insurance, etc) into one account Key benefit : By using master trust and wrap account, investors/managers can hold an investment portfolio under one account with centralized reporting (easier to manage our portfolio and check the annual tax statement, less management fees, safe quick and efficient Key difference Investments in a wrap account is portable (you can move assets to another wrap account) Investments in master trust is not portable (you can’t move assets to another master trust) © 2018 Financial Planning in Australia: Advice and Wealth Management, 8th edition, Chapter 11: Questions with guided solutions created and updated for this edition by Roger Juchau.

Real estate managed fund Charter Hall group & shopping centres Australasia property Group (High growth in their asset value) Cromwell Property Group (higher profit) Multi-sector managed fund : Vanguard Conservative Index Fund and CFS WS Conservative Fund General managed fund : Mutual Cash Term Deposits and Bank Bills Fund Australian Ethical Balanced Fund OA Frontier IP Vanguard Balanced Index Fund Chapter 11: Investing in Managed Funds Question 2 Outline the role of the investment manager. The investment manager buys and sells securities and oversees the portfolio. There are usually 3 parties participating in this phase of this operation - Portfolio manager: the one who actually runs the portfolio & makes the buy and sell decisions - Securities analysts: analyse securities and look for viable investment candidates - Traders who buy and sell big blocks of securities at the best possible prices Question 3 Distinguish between a listed and an unlisted fund. Unlisted fund Buy and sell transactions are carried out at prices based on the current MV of all the securities held in the fund’s portfolio (NAV) The unlisted managed funds value the units weekly or monthly The units are bought back by the issuers a. Open end unlisted fund continuously issue new units to obtain newfunds from investors and then use these funds to invest in more assets b. Close end unlisted fund normally wont issue units to obtain extra funds c. Units of unlisted funds can be traded through brokers and price won’t fluctuate the way listed funds do Listed funds Managed fuds operate with a fixed number of units issued and don’t regularly issue new units. Done between investors in the open market tradable on stock exchange such as ASX The fund doesn’t play role in buy or sell transactions a. Normally with a fixed number of units & don’t regularly issue new units

© 2018 Financial Planning in Australia: Advice and Wealth Management, 8th edition, Chapter 11: Questions with guided solutions created and updated for this edition by Roger Juchau.

b. Unit price will change frequently and listed funds invest is an expensive, illiquid or difficult to access assets (infrastructure or commercial property) Differences Listed Funds Have a fixed amount of capital, no new money entering the fund No concerns about keeping cash on hands for customers redemption (sell their units) More aggressive on investment styles & able to find longer-term investments

Unlisted funds Have concerns about finding new investments Have to keep cash on hands to readily meet customers’ redemptions

May not commit to long term investments since they may have to think about customers’ short-term redemptions Investment styles and fund portfolios The transaction only occurs between are judged by the market the customers and the issuer Unit prices determined by general Unit prices are based on their NAV supply and demand conditions in the market Question 5 Why do wrap accounts appeal to small investors? Wrap account enables investor’s portfolio to be managed (via a wrap) through one cash account which can be invested in a large range of managed funds. The wrap generates a single consolidated report on the performance, manages dividends and income distributions. They also offer wrap-service advice. Small investors also are able to access wholesale managed funds 1. Overviews and supervises the investor’s investments and undertake related administration 2. Generates regular reports showing investors details regarding their investment portfolio (performance, dividends, distribution, taxation, projection, market analysis, etc.) 3. Most professional managed funds such as hedge funds has a minimum investment of $500,000 or even $1m dollar However most wrap accounts only requires a minimum investment of $25,000 to $100,000 investors with less money can also use wrap account. Wrap accounts are actually very easy to manage, they will notify you through email if you need to add more balance or something. Question 6 When examining a managed fund’s investment performance, what information should be reviewed? - How the fund has performed over the past 5-7 years - Type of return it has generated in good markets as well as in poor markets - Level of income and capital gains distributions © 2018 Financial Planning in Australia: Advice and Wealth Management, 8th edition, Chapter 11: Questions with guided solutions created and updated for this edition by Roger Juchau.

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Type of investment stability (volatility/risk in the fund’s return) Performance about the fund manager Composition of the investment portfolio, investment process and philosophy Current and proposed government regulations and the fund’s ownership structure such as corporate culture, transparency, taxation and ownership stability

Question 8 Explain why fees and costs are important in fund selection. Entry/exit fees don’t add value to the funds and therefore the returns earned by funds charging entry/exit fee in general don’t seem to be any better than the returns from those which only charge annual fees. Differential returns between those will also compound with longer holding periods and therefore when considering to invest in managed funds the rule is that you should consider sticking to funds with no/low entry/exit fees. 1. Fees and costs will reduce our final return from managed funds Funds with higher fees can reduce returns especially over medium to long term 2. If funds charge fees based on asset size of funds or investment performance it would be more expensive if asset prices ae rising or investment return rises 3. Ongoing fees such as management fee (up to 2.5%), administration fee (around 0.1%), low-balance fee, performance fee (most funds don’t charge you this fee) % are based on your account balance or annual investment return 4. One time fees such as transaction fees (when you initial a transaction or withdraw money) and applicable account fees

Problems Chapter 11: Investing in Managed Funds

Problem 1 The following data is for three equity funds: Fund Net Min Return % pa assets $m invest 1 Yr 3 Yr 5 Yr MLO 4.43 $1 000 −4.96 15.02 18.52 GIST NEFN

3.43 2.01

$3 000 $5 000

−7.62 −11.30

12.43 9.82

16.17 14.64

Entry %

Exit % MER % pa

5.13

—

0.85

4.00 —

— 4.10

1.65 2.44

Comment on their performance and compare them with the top three equity funds listed by Morningstar at your date of enquiry. Key data to focus on

© 2018 Financial Planning in Australia: Advice and Wealth Management, 8th edition, Chapter 11: Questions with guided solutions created and updated for this edition by Roger Juchau.

1) Which fund has the highest net asset? MLO 2) Which fund is more suitable for investors with small amount of money? 3) Which fund has the most stable return for 3 years? 5 years? NEFN Problem 6 You have uncovered the following per-unit information about a certain listed fund: 2015 2016 2017 Ending unit prices ($): Offer 46.20 64.68 61.7 8 NTA 43.20 60.47 57.7 5 Income distributions 2.10 2.84 2.61 Capital gains distributions 1.83 6.26 4.32 Beginning unit prices: Offer 55.00 46.20 64.6 8 NTA 51.42 43.20 60.4 7 Evaluate this fund’s performance 2015 to 2017, identifying changes requiring further investigation.

Problem 7 You have been approached by a conservative investor for guidance on investing in property and property managed funds. He is concerned about the drawbacks of investing directly in property or indirectly in property managed funds (REITs). Outline how a conservative investor may balance the risks of both investments, medium to long-term. Extra question (IMPORTANT!!) 1 year ago, the unit of YZ Fund was trading at $77 when its Net Asset Value per unit (NAV) was $71. Today the fund’s unit trading price is $84 while its NAV

© 2018 Financial Planning in Australia: Advice and Wealth Management, 8th edition, Chapter 11: Questions with guided solutions created and updated for this edition by Roger Juchau....