What is a managed fund?

In this guide for New Zealand investors we will explore the meaning of managed funds, how they work, their benefits, potential risks, and important considerations when choosing the right fund for your investment objectives.  

• What is a managed fund?
• How a managed fund works
• Different types of managed funds
• What are the costs of a managed fund?
• Benefits of investing in a managed fund
• Potential risks of a managed fund
• Considerations when choosing a managed fund

What is a managed fund?

Managed funds are investment vehicles where multiple investors pool their money together to create a diverse portfolio of securities. In a managed fund, investors own units representing their share in the fund's assets, and these assets are invested on their behalf by a professional investment manager. 

This structure allows investors to access a range of investments they might not be able to access individually, and the investment manager aims to use their knowledge and experience to help grow the money invested. 

How a managed fund works

A managed fund is generally an investment option within a managed investment scheme.  Each managed fund within the scheme will have a different mix of growth or income assets depending on the investment strategy and risk profile of the managed fund. 

When investing in a managed fund, you purchase units at the current unit price, which is typically determined by the fund's net asset value (NAV). The NAV represents the total value of the fund's assets minus its liabilities. As the fund's holdings fluctuate in value, the NAV changes, affecting the unit price. 

In New Zealand, the managers of managed investment schemes must hold a licence issued by the Financial Markets Authority (FMA).  Managed investment schemes are constituted under a trust deed and further governed by legislation and regulations as well as guidelines set by the FMA. These regulations ensure transparency, investor protection, and adherence to industry standards. 

PIE funds

Most managed investment schemes funds are portfolio investment entities (PIE). A PIE is a type of investment entity that has special tax rules and can have tax advantages for investors. By investing in a PIE, an investor’s tax is calculated based on their individual prescribed investor rate (PIR). 

A PIR is the investor’s tax rate that is used to calculate the tax on the income derived from the investment of that investor’s contributions. An investor’s PIR may be lower than their marginal tax rate.  

Different types of managed funds

Managed funds encompass a variety of options tailored to different investment objectives and preferences. Here are some common types of managed funds in New Zealand: 

• KiwiSaver schemes: KiwiSaver is an initiative designed to help New Zealanders save for their retirement. KiwiSaver schemes invest contributions from individuals into a range of investment assets, providing long-term growth potential. These schemes offer various risk profiles and investment strategies to cater to different investor preferences. 

• Property investment funds: Property funds may invest in a portfolio of properties, including residential, commercial, or industrial properties. These funds allow investors to access the real estate market without the need for significant capital or direct property ownership. Property funds generate returns through rental income and capital appreciation of the underlying properties.  Property investment funds can be risky, and investors should carefully consider the issuer’s financial strength and any projections of future earnings disclosed by the issuer at the point of investment.  

• Wholesale funds: Wholesale funds are typically accessible only to eligible wholesale investors who have a have a higher level of investment experience and a significant amount of capital to invest. Wholesale funds are generally niche investment options that are designed for investment businesses or sophisticated investors. 

• Exchange-traded funds: Exchange-Traded Funds are investment funds that trade on stock exchanges like individual stocks. ETFs aim to replicate the performance of a specific index, sector, or asset class. These funds offer diversification, flexibility, and ease of trading. ETFs can be low-cost options compared to other managed fund and provide transparent exposure to a wide range of markets. 

What are the costs of a managed fund?

The investment manager will charge a management fee for their expertise in managing and investing your money. The management fees are usually calculated as a percentage of the fund’s net assets and generally cover the research costs and operational and administration expenses of the managed fund. Other fees may also apply, such as performance-based fees,  member fees, or one-off charges such as exit fees. The product disclosure statement (PDS) of the managed investment scheme will outline all of the fees and charges involved with the managed fund. 

Benefits of investing in a managed fund

Managed funds offer numerous advantages for investors, including being a diverse ‘basket’ that covers a range of assets. By pooling resources and leveraging the expertise of investment managers, investors can access a range of benefits that can help them achieve their financial goals.  

In this section, we will explore some of the key benefits of investing in managed funds. 

Investment diversification

Managed funds can offer some diversification, as depending on the investment profile of the fund, the investment managers may invest in a range of assets such as shares, bonds, and cash. This diversification helps to reduce the risk associated with investing in a single asset or market sector. 

By spreading investments across various asset classes, sectors, and geographical regions, managed funds aim to provide a balanced and potentially more stable investment over the fund's suggested investment timeframe. 

Diversification also allows investors to access investment opportunities that may otherwise be out of reach. Investment managers can tap into markets that require significant capital or specialised knowledge, providing individual investors with exposure to a diverse range of securities. 

Accessibility

Managed funds can often have relatively low investment minimums, helping to make them accessible to a wide range of investors. Managed funds can also offer convenience and simplicity. Investors buy or sell units at the current unit price which allows investors (other than those in KiwiSaver schemes or other locked-in retirement savings schemes) to enter or exit the fund based on their individual financial goals and market conditions. 

Liquidity

Managed funds generally offer liquidity to investors, meaning they can buy or sell their units at the current unit price. This liquidity can allow investors to access their funds and make investment decisions based on their financial needs and goals. 

However, it's important to note that managed funds can sometimes place restrictions on withdrawals. An example of this could be where assets are unable to be priced due to conditions affecting financial markets. This limits the immediate liquidity of investments within a scheme. Investors should carefully consider their investment time horizon and liquidity needs when choosing a managed fund. 

Access to professional investment managers

One of the key benefits of managed funds is having access to professional investment managers who possess extensive knowledge and expertise. These professionals are responsible for conducting research, analysing market trends, and making informed investment decisions on behalf of the fund. 

Investment managers monitor the fund's investments, assess risk factors, and adjust the portfolio composition as necessary. They aim to optimise returns while managing risk, employing strategies that align with the fund's investment objectives.  

This management and guidance can be particularly valuable for investors who may not have the time, knowledge, or resources to make investment decisions on their own. 

Regulation of managed investment schemes

Managers of managed investment schemes operate under legislation and regulations and are responsible for ensuring compliance with the legislation and regulations. This can include meeting licencing obligations, reporting requirements, disclosure of fund information, and the fair treatment of investors.  

Managed investment schemes in New Zealand must have an independent Supervisor. The Supervisor is responsible for ensuring that the Manager is meeting its obligations under the trust deed and is acting in the best interests of investors of the scheme.   

The FMA is the overall regulator of financial services and their regulatory oversight provides an additional layer of security and transparency for investors and aims to protect the interests of investors and maintain the integrity of the financial markets. 

Risks of investing in a managed fund

While managed funds can offer a range of benefits, it's important to consider potential risks as well. Understanding the potential risks can help investors make informed decisions and mitigate any risks involved. In this section, we will explore a few key considerations that investors should keep in mind when evaluating managed funds.  

Your investment balance may go down

It’s important to remember that the value of funds may go down as well as up, so you may get back less than you invest. Ensure the type of fund you invest in is aligned to your risk appetite and investment timeframe. In New Zealand, each managed fund must have a Risk Indicator which is a number between 1 – 7 that indicates how much the value of the fund’s assets will go up or down (known as volatility). 1 indicates a low risk of volatility and 7 shows a high risk of volatility. 

Control over investment decisions

By investing in a managed fund, the investment manager makes all of the investment decisions. While this can be advantageous for those seeking professional guidance and expertise, it means you will not have direct control over investment decisions made within the fund. 

Understand the fees you pay

While managed funds offer professional management and guidance, it's important to be aware of the associated fees. Investors should carefully assess management fees and any other fees charged (such as performance-based, member fees or exit fees), and compare the fees charged by other similar funds. 

Restrictions on withdrawing your savings

While managed funds generally offer liquidity, there can be some instances where certain restrictions apply. For example, restrictions on withdrawals can sometimes be imposed under volatile market conditions making some assets illiquid for a period of time.  

Investors should carefully review a fund's disclosure documents such as the PDS to understand any conditions in which restrictions on withdrawals may apply. 

Considerations when choosing a managed fund

Selecting the right investment is a crucial step in building your savings and meeting your investment goals. In this section, we consider what investors should keep in mind in choosing when and how to invest. 

Your attitude to investment risk

Understanding your attitude to investment risk is important to help you understand how to invest your savings. Every investor is different, with a different approach to investing. Higher returns are seldom achieved without higher risk. Some people want to have little risk of loss and are prepared to accept a low return. Others would prefer a high rate of growth and don’t mind taking on the risk of a loss. Our MAS Fund Finder can help you find a fund that matches your attitude to investment risk.  

Getting the right advice

Everyone’s financial journey is different, and it is important to seek advice from a financial adviser. A financial adviser can help you make more informed investment decisions, matching your attitude to investment risk, investment timeframe and your personal circumstances to the right type of investment. MAS has over three decades of experience and expertise in managing funds. 

Your ethics

If ethical investing is important to you, it's essential to research investment managers with a strong track record in ethical investing. When selecting companies to invest in, ethical funds typically consider environmental, social, and governance (ESG) factors alongside risk and return. Assess the investment manager's approach to responsible investing and ensure their investment philosophy matches your ethical values. 

Fees charged

Different investment managers charge varying fees for their funds. Fees are an unavoidable aspect of investing in managed funds, so it's crucial to understand the fees being charged. Additionally, it's advisable to compare these fees with those of other similar funds. 

Access to advice

Everyone’s financial journey is different, and we’re here to help our Members create the financial future that is right for them. 

We offer access to a nationwide network of MAS Advisers to help you with your investment decisions, at no additional cost. 

You can speak with a MAS Adviser in person or on the phone for simple general advice, such as making the right fund choice to meet your savings goals and adding extra contributions to your investment.  

If you would like to talk to a MAS Adviser, phone 0800 800 627 or email info@mas.co.nz.