Fund managers find new friends in volatile times

Managed funds are suddenly back in investors' good books - here's why.

Summary: Managed funds are experiencing a surge in popularity for the following reasons: their ability to provide quality overseas exposure, investors’ fears about losing capital through their own failed stock picks, increasing allocations in DIY funds and the changing way investors are researching fund managers.

Key take out: Just like stock selection, picking a portfolio manager to suit your needs requires detailed research – and with more information available, investors are coming back around to the option of managed funds.

Key beneficiaries: General investors. Category: Managed funds.

It wasn't that long ago managed funds were very much out of fashion, their often-lofty fees and regular inability to beat the market sent customers away in large numbers. 

Now it looks like there’s a significant swing back towards the trend of paying someone to shape your portfolio. Recent research from Investment Trends suggests that the number of investors looking to add exposure to unlisted managed funds in the next 12 months has doubled between 2013 (6 per cent of investors) and 2015 (12 per cent).

For any seasoned investor, it's an extraordinary turnaround: from heroes to villains and back again, it seems fund managers are back in fashion...but why? Has something changed...have they changed? Let's look a little deeper.

Source: Investment Trends

It's a reliable pathway to global exposure

It’s estimated that close to 30 per cent of investors are looking to managed funds for international exposure – this is up from 18 per cent in 2013. This global view is paired with an increased interest in managed portfolios as a way of diversifying assets in the current market climate.

At Eureka Report we’ve covered global exposure through managed funds in detail over the past few months: Kirstie Spicer has written on Magellan Global, BT Wholesale European Shares Fund and the Lazard Global Small Caps Fund just to name a few (to read more managed funds coverage, click here). These options provide investors with high growth exposure to companies not available on the ASX.  

A quick glance at the mandates of these funds highlights the benefits investors are chasing:

• Exposure to sectors that require significant research  – including multinational consumer brands that operate in Australia but are not listed here.

• Access to an incentivised management team performing quantitative research across markets. Implicit in this development is an acceptance among some investors at least that performance - above firm benchmarks - should be rewarded.

• Benchmark-unaware investment approaches that are able to avoid undesirable sectors while capitalising on areas where the management team see growth. 

There is evidence to suggest that investors are unsure of how local and international markets interact – a recent report by CBA and the SMSF Association indicated that 74 per cent of female and 49 per cent of male DIY fund holders lacked confidence when it came to explaining international exposure across different asset classes.

This could also shed some light on the renewed interest in portfolio managers – in an investment world demanding exposure to new markets, it makes sense to defer some of these decisions to individuals who can watch stocks day in, day out. Holding international shares directly is more straightforward than ever, but even with an online brokerage account (you can Eureka’s coverage of this space here: How to invest in offshore shares), investors still must put the time into researching stocks, dealing with the required tax paperwork and paying sometimes substantial brokerage on trades. Investors look to be coming around to the idea of handballing to a fund manager for a more time effective approach to the markets they’re unsure about.

Help! It’s all too hard

Investment Trends have also found a decline in risk tolerance of investors, but particularly those in accumulation phase who are pre-retirement and still have time to earn an income. This diminished risk tolerance comes in light of the list of long-term concerns that Australian investors are now considering: 50 per cent of surveyed investors said they were worried about ANOTHER global financial crisis, while 47 per cent worry about the future of Australia’s economy and 22 per cent have future military conflicts in the back of their minds when making investment decisions.

This lesser tolerance for risk, combined with a lack of confidence, make managed fund structures an attractive option for those less willing to lose capital through their own individual stock picks.

The DIY crowd

Then there’s Australia’s SMSF sector and the ever-increasing sum of assets within it. Research from One Vue on DIY fund assets suggests that in the December quarter found the platforms’ clients increased their investment in managed funds by 5.1 per cent – against a drop of 4.89 per cent in listed shares. The very appeal of the DIY fund is the ability to invest as one pleases, across asset classes, including property – yet it seems that the involvement of portfolio managers is growing in popularity faster than individual shares inside super:

Source: One Vue

Across the entire SMSF sector, investment in unlisted trusts and other managed investments has also increased as a percentage of total assets held – as you can see from the below chart of ATO data:

Source: ATO quarterly SMSF report, December 2015

Researching products, not stocks

If you feel like you have more information at your fingertips as a savvy investor, that’s because you do – and this is a major win for researching managers. Mitchell Sneddon wrote on this most recently for Eureka Report (read: LIC managers, finding your perfect match, February 29, 2016), and it has never been easier to get a full dossier of information on the fees, track record and professional backgrounds of management teams prior to committing to a managed fund or other portfolio.

The Investment Trends report suggests that more investors are learning about managed funds options from avenues other than financial advisers than ever before. Instead, many are turning to newspapers, magazines and publications like Eureka, word of mouth through experiences of family and friends, and most notably, investment forums and websites.

Just like stock selection, the process of picking a managed fund is one that requires research, time, and an evaluation of investment goals. Faced with choppy markets and with the internet at their fingertips, investors are coming back round to the idea of handing things over to managers who watch portfolios minute to minute. In the quest to preserve capital, investing is becoming a team effort once again in those areas investors find just too to hard on their own.

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