Direct investment or managed funds? Which one is best?

This is another debate which will rage forever. With more fuel being put on the fire now that Exchange Traded Funds (ETF’S) are now available. ETF’s are managed funds listed on the stock exchange so they trade like a share.

Rather than arguing that you will do better in one or the other, I would simply urge you to match the structure of your investments to your needs

Direct shares are a more active investment, whereas Managed Funds are more passive investments. 

If you look at it in comparison to a football game, the direct share investor want to know who scored who assisted and who the most valuable player was. A managed fund investor wants to know if his team won or lost.

Managed funds and ETFs have practical advantages for some investors.  They may be of use to you if you wish to:

1.  Invest in overseas shares or other special asset classes

2.  Let someone else make all the investment decisions

3.  Make small regular investments

4.  Exploit arbitrage opportunities between managed funds and listed investment companies

For all but the largest investors, managed funds are the only practical way of investing in overseas assets.  While you can buy and sell overseas shares from Australia, it’s inconvenient and expensive. 

Inside of a Managed Fund the fund manager makes all the decisions about investment selection, timing, and allocation to various markets and sectors. 

I don’t think this approach produces the best results; it is my experience the more effort you put in the better the result. However, a surprisingly large number of people feel more comfortable investing through managed funds then being directly responsible for the investments themselves.

Managed funds are more suitable for following type of investors:

·         small initial investments as they provide better diversification

·         you wish to make a regular monthly investment of as little as $100,

·         less input required by the investor fund manager make all of the decisions

·         looking for cost effective international investment exposure

Exchange traded funds (ETF’s) and Listed Investment Companies (LIC) are similar to managed funds in that they carry on no business other than buying, holding, and selling shares in other companies.  Unlike managed funds, however, both shares trade on the share market so you can buy or sell conveniently at any time and how they are priced.

When you buy or sell units in a managed fund, you do the transaction at a price very close to the value of the fund's assets.  For example, if a trust has assets of $100m and it has 100m units, then it has net assets per unit of $1.00.  If you want to buy units you'll pay about $1.005, and if you want to sell you'll receive about $0.995.  This difference is called the "spread" and it's designed to shift the cost of trading in and out onto those investors who come and go.  This is fair, because otherwise the transaction costs would be borne by the long term investors.

ETF and LIC shares, on the other hand, are subject to the whims of the market.  An LIC with net assets of $1.00 per share might trade on the market for 90c or for $1.10.  Waves of enthusiasm and despair pass regularly through the market, and quality LIC shares regularly swing back and forth between trading at a premium (a price above asset backing) and at a discount (a price below asset backing).

As many fund managers offer the same product as a managed fund or a ETF or LIC the difference in the way these price allows at time for you to move between the managed fund and the listed version for a profit while still having the same investment exposure and risk associated with the investment.

You will however need to have a good broker to advise you when the time is right.