We are reviewing the advice given in relation to investment into a managed fund:
I recommend you invest into a managed fund to achieve the best returns over the medium to long term.
Our advice on the above:
Managed funds work on the basis that you give your capital to a company and they maximise the return from your investment and minimise the risk. They do this by spreading your capital across a wide range of different assets. What do I mean by assets? I think most people are comfortable with the fact that equities (stocks and shares) are an area where you can make the best returns. They are also an area where if invested inappropriately you can make the most losses too. Equity is an asset, as is property.
I would expect to see a managed fund spread across a wide range of assets such as equities, fixed interests (loans to companies and governments – which are generally low risk) cash and property to name the main ones. Furthermore, within that, I would expect to see a further spread by geographically changing the assets held. So, for instance, I might expect to see UK equities as well as overseas equities. There are two main reasons why I might see more capital held in uk assets than in overseas assets: The main reason is currency risk. What I mean by that is a foreign equity purchased in sterling could see a double whammy loss. The first is the obvious drop if the market goes down. The second is the currencies moving against each other. Not only could you lose on the market but the currency could devalue and you could lose again – not nice reading at valuation time; another main reason is that most UK fund groups don’t invest heavily in staff overseas to understand the foreign markets. Their expertise generally lies in the UK and as such an investment overseas is less understood.
One thing to be mindful of is the amount of capital held in managed funds. With profits is a disguised managed fund and currently there are over £400 billion invested in them – how times will change.
So are they any good? Well, not really in my opinion. How can one manager know what the best UK, Japanese, Chinese, and Indian stocks are? How do they know what the best foreign properties are? On that basis we have always advised investors to choose the best funds and fund managers in each particular region. So for example I might say that Jupiter have a brilliant UK fund and Legg Mason, a good Japanese fund. I therefore invest accordingly picking the best of breed in each area. There are some fund groups who do that for you, as most financial advisers don’t have the expertise. And so commence the birth of multi manager funds. Expect to pay more but don’t for one second think they are good because they call themselves multi managers, for they are not. I often look at the funds they hold within their group and scratch my head with disbelief. When you see the eventual numbers appear you can see they are indeed expensive as they are not adding value over other similar investments. Jupiter Merlin Growth is an example of excellent management and performance, but of course take advice before you invest.
Some cite tracker funds as an alternative but I do not. In falling and sideways markets, trackers do exactly that. They are sold on the basis of cheapness. You wouldn’t take the cheapest food (out of a bin) so why take the risk with your capital?
During the last 5 years your capital would have been down had you held a tracker fund as the market is down. If you had held a fund that moved your capital around this would have lessened the impact and in bad times you may have held more defensive assets (fixed interests) and when the market became more buoyant you could have held more boisterous assets such as equities.
Worldwide’s score: 3 out of 10