It’s time to start thinking differently about how you invest…

Over time investors have been bullied into believing Managed funds are the only way to invest. They have dominated the shelf space of platform providers, being the administration tool used by most Advisers to invest clients’ money. The long running issue with platforms is that they limit the availability of investments, thus restricting an Adviser’s ability to recommend the most appropriate solution for the client.

Managed share market funds have long been promoted because they
a) provide exposure to a broad number of companies and b) are operated by a professional manager with expertise that the individual does not have.

The short comings of managed funds are these –
You the investor, have no control. For example: As markets fall, nervous investors begin to redeem units in their managed fund investment. To provide funding, the manager could be required to sell quality companies within the fund. This potentially triggers a capital gains tax (CGT) event. So not only would you see the value of your investments fall during the year, you are also slugged with a CGT liability at the end of the year to boot. This is entirely out of your control.

Furthermore, those units that were sold during the year at deflated prices equate to crystalised losses that remaining unit holders can arguably never get back, severely restricting the fund’s ability to return value to the unit holder.

Fees - The average fee on a managed fund is around 1.5 – 2% per annum, in addition to any applicable entry or exit fees (up to 4% in some cases), plus they pay your Adviser a trail commission for investing in their product.
I put it to you that a much simpler, cost effective alternative exists. Listed Investment Companies, or LICs have existed since the early 1930s. Essentially they operate the same as a managed fund only they are companies listed on the Australian Stock Exchange. Their sole purpose is to manage a portfolio of Australian company shares, not restricted to managing the portfolio to mirror an index, as many managed funds are. This allows them to take advantage of opportunities and manage risks.

Investors are in control of the investment. Shares may be sold only when they decide, allowing the investor to manage any CGT outcomes of such a decision. Shares sold on the ASX have no influence on other shareholders or the manager’s ability to manage the portfolio.

Listed Investment Companies pay investors consistent and reliable dividends year on year in the form of fully franked dividends. Most Australian Share Managed Funds also pay annual dividends, however, the amount can be eroded by redemption requests throughout the year and is difficult
to predict.

What about fees you ask? The management costs of a listed investment company is equivalent to Managed Fund fee of around .15 - .20% per annum and there are no entry or exit fees, just the brokerage to buy or sell on market.

What about performance? Looking at the two largest LICs on market, Australian Foundation Investment Company (AFI) and Argo Investments (ARG), they have each outperformed the ASX All Ords Accumulation Index over 1, 5, 10, and 20 years.

Investing need not be complicated, but it is always recommended to seek professional advice prior to deciding the most appropriate course of action.
Note: The above article is not intended to be construed as personal investment advice and should not be acted upon without first seeking the advice of a qualified professional.