Drawing on the expertise of a portfolio manager is a great step towards financial security, but there are key reasons to avoid managed funds
Managed portfolios and managed funds share several similarities - in fact, many investors may even assume that they are the same service. However, it’s important to be aware of the distinction, because there are significant differences that emphasise just how beneficial it can be for an investor to opt for a managed account in place of a managed fund.
What’s more, managed portfolio accounts are in many respects, a ‘win-win’ for both clients and advisers because they underpin the strength of a prosperous professional relationship. From an asset manager’s perspective, with less administration in dealing with managed accounts, portfolio managers can make do without charging certain fees that a managed fund would typically entail.
Beyond that, it also means that portfolio managers can spend more time individually with each client, understanding your specific investment goals, investment strategy and risk appetite. This helps professionals present you with investments that are in alignment with your target objectives, tailored towards achieving the best outcome for you.
What relationship will I share with a portfolio manager?
One of the most prominent benefits of managed portfolios in lieu of managed funds is your direct relationship with an experienced portfolio manager. That’s not to say that you won’t have an experienced fund manager operating a managed fund, however, in that instance the ability to forge a relationship with said professional is significantly restricted because of the structure of the fund.
That is, the fund manager doesn’t need to vet each investment with you, nor ask for your thoughts, as you are buying into a pooled fund with a high volume of other investors. In contrast, you will personally get to know and work with the portfolio manager who runs a managed account as your input will play a notable role in maintaining personal risk exposure.
How does the structure of a managed account differ to a managed fund?
A managed portfolio account affords you direct (or beneficial) ownership of all holdings that are invested on your behalf. These shares are specifically in your name, which also means that any dividends or tax credits flow through to you as an individual. The story is very different for a managed fund, where the equities are ‘pooled’ by the company and you own units in that fund.
Because of this structure, you have no insight over what decisions are made in a managed fund. You also give up all control as far as the dividend and tax implications that come with those decisions. On the contrary, a managed portfolio means you can personally invest with regards to your tax circumstances. For capital gains tax (CGT) purposes, a tax event only commences when you buy a share, while liabilities only arise once you sell.
One of the unfavourable traits that accompany managed funds involves unit holders inheriting capital gains tax, even though you may not have derived any benefit. If a managed fund performs poorly, unrealised tax losses can be diluted by new investors who enter the fund. In addition, you are prohibited from applying any such losses against capital gains incurred outside the fund.
What are the operational benefits of a managed portfolio?
Ultimately, the mechanics of a managed portfolio account provide transparency for investors. Not only do managed accounts provide you with insight into the positions you currently hold, but it also means visibility as to the cost base of each holding, plus details on every single trade. These details simply aren’t provided to investors in managed funds, where there may be hundreds of trades that you would otherwise never know about.
Managed accounts provide far superior records. For a managed fund, to understand the underlying performance of key trades, you would have to potentially bury through quarterly or bi-annual statements, and even then, rely on extensive guesswork. None of that is required for a managed account as not only do you actively liaise with your portfolio manager, but you receive regular reporting documentation that details each and every trade, dividend and corporate action.
There is also significant convenience and flexibility for investors who allocate their capital towards managed portfolios in place of managed funds. After all, once you are in a managed fund, there is some complexity when it comes to exiting (redemptions). As you have an ownership of units in the fund, and not the underlying shares, you are unable to transfer shares and must redeem your units, which often entails restrictions.
As such, the liquidity of your position is significantly restricted in a managed fund, not to mention if other investors liquidate their units and reduce the assets available to the fund. Besides that, certain market events can sometimes trigger a rush of redemptions, which may result in a halt of all withdrawals. Compare these risks with a managed account and the comparison is chalk and cheese. If you want to transfer shares in, or out for that matter, both can be arranged with ease.
How do fees differ between a managed account and managed fund?
Last but not least, it’s worth weighing up the costs of both options. While managed accounts do involve management and performance fees, these are typically in alignment with those charged by managed funds. That is, a 2% management fee, and a 20% performance fee.
However, it’s worth keeping in mind other costs that are sometimes not so obvious. Once you take these fees into consideration, managed accounts can potentially be a more cost-effective option. To expand on this, managed portfolios often come with reduced brokerage costs because of consolidated trades. In fact, the International Growth Portfolio has no brokerage fees at all. But beyond that, managed funds typically involve up-front entry fees, redemption and exit fees, and buy/sell spread costs.
Once you start to factor these costs into the equation over the life of your investment journey, and you also take into account the numerous benefits provided by managed portfolios, it’s easy to see why Australian investors should embrace a new generation of managed accounts designed to help you achieve financial security.