LIC’s, ETF’s, and Managed Funds

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Financial Planner Adelaide

Steve Greatrex

Different Investment Vehicles
Reading the financial press can be confusing for consumers – companies are using and promoting different investment vehicles. What are the main types of investment vehicles and what are their pros and cons?

Managed Funds
The most common investment vehicle in Australia is a Managed Fund (the US equivalent being a Mutual Fund). Most public superannuation funds in Australia have a managed fund structure. The first mutual fund, the Massachusetts Investors’ Trust in Boston, started in 1924 and opened to investors in 1928 (according to Investopedia). The first investment company in Australia was also founded in 1928 by JB Were – Were’s Investment Trust Limited.

Managed funds are a pooling of monies that are then managed by professional investors. Generally they have a unit trust or unitised structure, though many industry funds are not unitised. Their advantages are:

1) A professional does the research for you
2) It offers diversification, either across one asset class (say an Australian Share Fund), or across multiple asset classes, like a Balanced Fund.
3) Investors can access the fund with low minimum amounts in most cases, for example $10,000 or even less.
4) You can often sign on for a regular investment plan.

LIC’s
Listed investment companies, or ‘LIC’s’, are investments that are listed on an exchange such as the Australian Stock Exchange (‘ASX’).
They have similarities with Managed Funds, such as professional management of the monies, but are ‘closed end’. That is there are a fixed
number of shares and investors buy and sell the shares.

The main issue with this is that they trade at a discount or a premium to their Net Tangible Assets (‘NTA’). Generally more established funds trade at a premium to NTA and newer fund at a discount (though this may also be related to the fees they are charging).

ETF’s

Exchange Traded Funds (‘ETF’s’) are a form of managed fund that can be bought and sold on an exchange like the ASX. Whilst LIC’s are companies, ETF’s are trusts – so you are issued units in the trust in an ETF. Where LIC’s are closed-ended, ETF’s are open ended – the manager can issue more units in the trust. ETF’s tend to be cheaper than LIC’s.

ETF’s don’t always mimic the benchmark indices they are designed to follow.

Which is Best

As an adviser, I have generally favoured managed funds. There are three reasons for this:

1) We do not have to worry about price variations in the ETF or LIC,

2) Often we recommend a form of industry fund, and this is only available as a managed fund,

3) One of our favorite fund managers, which has a science based approach to investing (not relying on star stock pickers), will not use these vehicles. They tell me the reason for this is that they do not want to expose to their competitors the investment choices that they have made.

If you need to know more, seek advice from a suitably qualified professional adviser.

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