THE VALUE OF PROFESSIONAL

FUNDS MANAGEMENT

HOW FUND
MANAGERS HELP
TO GROW YOUR
WEALTH
 What is funds management?
Key Messages Funds management is the professional management for smaller investors with minimum capital1. How right
of a pool of assets by an investment specialist known they were, as managed funds and the management of
This report outlines:
as a fund manager. This is generally on behalf of these assets have become a means for investors of all
• The importance of diversifying your superannuation funds, insurance funds or individual sizes to access professionally managed investments.
investment portfolio; investors such as Self Managed Super Funds (SMSFs). Today the asset management industry is entrusted
with over $76 trillion for retail and institutional clients
• The benefits of fund managers The history of pooled assets (or managed
globally. That is equivalent to 100% of the world gross
professionally managing your investments), dates back to 1774 with the creation of a
domestic product (GDP) and 40% of global financial
superannuation or investment Dutch investment trust as it was believed by providing
assets2.
diversification it would increase the appeal and access
portfolio;
• The increased access to a wider
range of asset classes through a fund
In a managed fund, your money is pooled together with other investors. An investment
manager; and
manager then buys and sells shares or other assets on your behalf. The value of your
• The pooling of risk when using fund investment will rise or fall with the value of the underlying assets.
managers.
ASIC Money Smart

An organisation that manages the investment of a portfolio of securities on behalf of

individuals and organisations, subject to the directions of the investor. Fund managers
offer pooled investment products and individual portfolios to a range of investors
including superannuation funds, institutions, and individuals.

Funds management can be accessed through many pensions, exchange traded funds and listed
different products and tax structures including investment companies.
investment trusts, superannuation funds, allocated

1
Investopedia – “A brief history of the mutual fund”
2
IMF – “the Asset Management Industry and Financial Stability”, April 2015

2 THE VALUE OF PROFESSIONAL FUNDS MANAGEMENT

What do fund managers do?
Fund managers are investment professionals who People invest money with fund managers to help
are entrusted to invest and manage financial assets them meet their financial goals and objectives. As
on a client’s behalf. Financial assets include stocks examples: ensuring you have sufficient money in your
(shares), bonds, property and cash. retirement; saving for that special holiday overseas or
purchasing a new car; or to ensure you have enough
money to look after your family in the future.

Using a fund manager either directly or through your superannuation fund gives you numerous benefits including:
1. Professional management of your management in companies and positively influence
superannuation or investment portfolio: access to business decisions affecting your investment.
professional investment specialists – these experts 5. Fund managers are continually managing your
have the knowledge and skills relating to funds investment: Fund managers are always monitoring
management as well as the time required to research portfolios so they can assess breaking news as it
markets, economies and companies. happens. Even when you are on holidays they are
2. Access to a wider range of asset classes that managing your investment. This could be reacting
individuals may find difficult to access themselves. For to a surprise change in interest rates to deciding on
example, global equities (shares), emerging markets, whether to participate in a rights issue.
property, alternatives or infrastructure. You can invest 6. Administration and paperwork: Owning one
into managed funds which in turn invest in these asset investment can generate a lot of paperwork, owning a
classes on your behalf. portfolio of investments will multiply the paperwork.
3. Diversification of your superannuation or Fund managers take care of all the paperwork for
investment portfolio: Fund managers help diversify the many investments they make and just send you a
your investments, aiming to reduce volatility of consolidated report.
returns. This is achieved by pooling your investment 7. Rebalancing your portfolio: In addition to selecting
with other investors in a managed fund. This allows appropriate investments, fund managers also make
the fund manager to invest in a wider range of sure the amount invested in any one investment stays
securities than if you invested directly. consistent with the objective of the portfolio. This
4. Greater access to company research and insights: requires regular rebalancing, reducing exposure to
Fund managers have access to research to help make investments that have done well or adding to those
informed decisions. As they represent large investors that may have underperformed in the short term.
in individual stocks, they can gain access to senior

THE VALUE OF PROFESSIONAL FUNDS MANAGEMENT 3

 How do fund managers help
to grow your wealth?
1. Superannuation 2. Self-Managed Super Fund (SMSF)
Most Australian workers are required to contribute If you run your superannuation through an SMSF,
superannuation into an authorised superannuation investing into a managed fund run by a fund manager
fund. Superannuation funds will professionally can provide you with the following benefits:
manage funds for their members and/or outsource
a. Diversification of your portfolio;
some or all of this money to external fund managers
to invest and manage on behalf of their members. b. Professional management of your superannuation;

The fund managers will invest this money in multiple c. Access to company research and insights;
asset classes and through various investment d. Access to a wider range of asset classes;
strategies, as determined by the superannuation fund.
These asset classes include Australian and offshore e. Continual management of your portfolio;
shares, property, fixed income (bonds) and alternative f. Administration and paper work taken care of; and
assets such as hedge funds, infrastructure and private
equity. This diversification helps lower volatility and g. Rebalancing of your portfolio if required.
maximise returns.
The fund manager will invest in the way that is 3. Non-superannuation investments - investing
mandated by the super fund. Superannuation funds directly with a fund manager
have a fiduciary duty to allocate resources to benefit
You can also directly invest into a managed fund in
their members. Your risk profile and life stage may be
order to grow your savings and investment for future
taken into account depending on which strategy you
goals, outside of your superannuation.
belong to.
For example, you may be in a balanced fund for
someone in their 40’s. The assets for this fund will be
very well diversified, include many asset classes, have
more growth assets to focus on higher growth.  On
the other hand a person in their 60’s may have more
income assets in their portfolio to focus on
yield/income.

4 THE VALUE OF PROFESSIONAL FUNDS MANAGEMENT

Styles of funds management
There are many types of fund managers who employ There are benefits to both active and passive
different strategies for investing and accessing management and both have a place in a diversified
different asset classes. investment portfolio.
Active management is where an investment team Asset classes include (for both Australian and offshore
actively manages the funds’ investments, and aims assets):
to beat the performance of an index (such as the - Equities (shares)
ASX200 or the S&P500) by utilising its own research to - fixed income (bonds)
determine the best securities to invest in. - cash
Passive management is where a fund’s portfolio - property
mirrors or follows a market index and aims to provide - alternatives, including infrastructure, private equity
the market return to investors. Products may include and hedge funds.
index funds or exchange traded funds.
Fund managers can help you achieve your retirement
goals and specialise in creating products which are
catered to these needs.

Figure 1: Funds Management Investments

FUNDS
INVESTMENT TRUST INSURANCE BOND

SHARES,
BONDS, LISTED
SUPERANNUATION INFRASTRUCTURE, INVESTMENT
FUND ALTERNATIVES, COMPANY
PROPERTY

MANAGEMENT EXCHANGE
ALLOCATED PENSION
TRADED FUND
Source: FSC

THE VALUE OF PROFESSIONAL FUNDS MANAGEMENT 5

 Stewardship and Fiduciary Duty
Stewardship is the principle that a fund manager investing (factoring in environmental, social and
should act at all times in the interest of the fund’s governance factors), as well as ensuring their own
beneficiaries or investors. As a manager looking after governance is best practice. Stewardship ensures
investor’s money, fund managers should adhere to that the investor’s long term interests are taken into
principles of good stewardship of that money. This account in investment decisions.
includes activities of engagement and responsible

Fund managers can positively

influence companies and the market
As large shareholders, fund managers can engage Fund managers are responsible for the allocation of
with the companies they invest in. They have the capital (the money entrusted to them) to productive
ability to influence business practices more than assets. In doing this, fund managers are providing the
an individual shareholder would be able to. In many resources needed by businesses to grow and prosper,
cases, fund managers will own a large proportion something that benefits not only the investors but
of a company’s shares and so can influence the all those employed by those businesses. Allocating
running and governance of that company. They play capital to the right businesses makes for a stronger
a role in ensuring the company is run in the best economy.
interest of shareholders and that companies are held
Fund managers can also share their knowledge on
accountable for their actions.
investment markets and products with:
This involves assessing how a company’s activity
- Financial advisors;
impacts the environment, how the company treats
employees and stakeholders, whether the company - Individual investors and SMSF’s; and
is being run in the best interests of all shareholders - Superannuation funds.
(and not just for a select few), and issues around
experience and independence of the board. As a result Fund manager websites can be a useful resource to
fund managers play a very important role in ensuring understand the market and investing.
companies are employing sustainable strategies for
your long term investment.

6 THE VALUE OF PROFESSIONAL FUNDS MANAGEMENT

Fees and returns
Australia’s open market and regulatory settings mean contestable funds in the world, meaning significant
our funds management sector is highly competitive efficiencies have been created in the market.
with over 400 firms – domestic and global – operating
Superannuation has been compulsory in Australia
in Australia.
since 1992, and since then the market has grown in
The pool of funds under management in Australia size and sophistication. Many global companies want
is over $2.6 trillion, one of the largest pools of to manage money on behalf of Australian investors.

Figure 2: Changes in Australian Investment Trust Median Fees by Major Asset Class, 2010–15
Aust shares Australian fixed Australian Real Estate Global Fixed Global Equity

1.8

1.6

1.4

1.2

0.8

0.6

0.4

0.2

0
2010 2011 2012 2013 2014 2015

Source: Morningstar Direct™

THE VALUE OF PROFESSIONAL FUNDS MANAGEMENT 7

 Superannuation fees in Australia are divided into Asset classes which traditionally offer higher returns
several parts including administration (charged by the tend to cost more than lower yielding asset classes.
superannuation fund), investment (charged by the fund Similarly, active managers typically charge more than
manager) and sometimes advice and insurance fees. passive managers because they must spend more
time and resource researching the market.
Investment fees charged by fund managers in
Australia are highly competitive and are among the Fees should not be viewed in isolation. Instead it is
lowest, if not the lowest, globally. This compares with important that you take into account both fees and
economies such as Japan, UK and USA. A survey by returns. When combined this is referred to as the
the FSC showed that fees in Australia were between net return, which is essentially the investment return
12% and 20% lower across asset classes as compared after deducting fees. It should be noted that while the
to these economies. cheapest funds may appear more attractive than more
expensive ones, they do not necessarily result in the
Fund managers will charge different fees depending
highest net returns.
on the asset class and the investment strategy used.

Figure 3: Changes in Australian Investment Trust Median fees by major asset class, 2010-14

Global Equity Australian Equity Australian Real Estate Global Fixed Income Australian Fixed Income

1.6
ICR%

1.4

1.2

1.0

0.8

0.6

0.4

30 Jun 2010 30 Jun 2011 30 Jun 2012 30 Jun 2013

Source: Morningstar

8 THE VALUE OF PROFESSIONAL FUNDS MANAGEMENT

 The benefits of diversification
In summary Diversifying your portfolio and holding investments A ‘balanced’ portfolio’s returns over rolling 10-year
over the long term reduces risk and volatility, meaning periods show no periods of negative returns and are
Investing with a fund manager will:
negative returns are minimised. significantly less volatile compared with shorter term
• Allow access to the investment horizons. The less volatile return profile enables
Spreading investments across multiple asset classes
expertise of a professional manager; investors to see past the haze of short-term market
reduces the overall risk of an investment portfolio.
movements and focus on achieving long-term
• Enable diversification of your This is because losses made in one asset class can
investment goals.
portfolio; be offset by gains in others. The diversified portfolio
is typically neither the worst nor the best performing
• Enable access to a wider range of investment in any given year. As a result, the overall
asset classes; and return is less volatile.
• Pool your risk with other investors.
Figure 4: Rolling returns of a balanced superannuation portfolio over varying time intervals

1 month 1 year
40% 10 years
40%
5% 30% 30%

3% 20% 20%
10% 10%
1%

-1% -10%
-10%
-3% -20% -20%

-5% -30% -30%

-40% -40%
-6%
-50% -50%
-7%

Source: Morningstar
Source: Morningstar

THE VALUE OF PROFESSIONAL FUNDS MANAGEMENT 9

 For more information on funds management, please go to
the ASIC Money Smart website or the Financial Services
Council website. Alternatively, contact a fund manager
to discuss your options.

www.moneysmart.gov.au
www.fsc.org.au

10 THE VALUE OF PROFESSIONAL FUNDS MANAGEMENT

While all due care has been taken in the preparation of this report, the Financial Services Council does not make any representation
or warranty in relation to the accuracy or completeness of the information contained in this report. Commentary, information or
material contained in this report is of a general nature only. This report does not in any way constitute investment, legal or taxation
advice and is not a substitute for specific professional advice. No person should undertake or refrain from any action based on the
information in this report without seeking advice from an appropriately qualified professional. The Financial Services Council accepts
no responsibility for any loss or damage caused as a result of the use or reliance on this report by any person.

Financial Services Council

Level 24, 44 Market Street
Sydney NSW 2000 Australia
www.fsc.org.au