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Are managed investment funds making a comeback?


RateCity Staff

By RateCity Staff

3 min read

2013 was a big year for Australian fund managers with the average fund outperforming the sharemarket by 18% which was the largest gain in 25 years. This mouth-watering return was largely due to fund managers avoiding investments in the resources and property sectors. The top performing fund for 2013 was Lazard Asset Management which recorded a return for the year of 36.6%.

Managed investment funds (unit trusts) have come under a lot of criticism over the last few years due to their high management fees and in many cases inability to outperform the index. In a stellar year the average Australian fund returned 23.2% in the 12 months to December 31 before fees, versus 19.7% gain in the S&P ASX 300 (Mercer consultancy).

Is this a beginning of resurgence for managed investment funds?

Passive funds (which mean your portfolios tracks an index) run by computer models were hit hard this year as active fund managers removed underperforming assets from their portfolio. While Exchange Traded Funds (ETF’s) and passive funds grow in popularity due to their simplicity and low fees, investors are missing out on the extra alpha (return) by using these types of passive securities.

There were big inflows in 2013 into balanced investment funds which offer a mix of growth and defensive assets for investors. They now account for 12% of managed funds as they prove to be able to handle high volatility situations and can have a range of asset classes pooled into one fund. They might include an allocation to growth assets such as property or shares, or hold cash to smooth out the volatility. Balanced investment funds aim to return 5% above the rate of inflation which means they will tend to underperform shares but outperform cash over a period.

Large fund managers have been incorporating ‘sustainability’ to their investment principles. There has been a demand for portfolios to invest in companies on the basis of their social, environment and financial credentials. Australian Ethical, an international equity trust fund had a bumper 2013 year with a return of 55.2%. They will not invest in industries that may include tobacco, alcohol and gaming which means their returns will be quite different to the overall performance of the Australian economy.

Over the last 3 years, fund managers, who dumped resource companies in favour of income producing stocks earned some of the biggest returns for investors. 2013 was an outstanding year for active fund managers who outperformed passive funds by a considerable margin. ETF’s are a cheap way of mirroring the performance to an index at a low cost. However like all ETF’s it means you’re exposed to poor performing stocks and high performing stocks within the index.

Identifying high performing stocks will always be the sixty four thousand dollar question. Active fund managers have earned their fees in 2013 and rewarded their investors with higher returns regaining some of the lost confidence by the investor public to consider a managed investment approach again. 

Find out more about investment funds with RateCity’s Investment Funds Guide.

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