One of the outcomes of the 2019 Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry was a significant change to the education standards for professional financial planners. For those planners like myself, it meant that we needed to ‘upskill’ and obtain current qualifications – the Diploma of Financial Planning that I completed in the late-90s didn’t meet the requirements.
So, over the past 2 years I’ve been doing study on a part-time basis and have a light at the end of the tunnel!! No, it’s not the freight train coming at me, it’s only one assignment to go and I’m finished!!
The subject I’m doing to finish is called “Investment Advice” and delves into (among other things) different types of fund management styles. So, I thought I would share some of this with you.
From single-sector funds to multi-manager funds, from active fund management to passive index management, the investment choice available to investors can be both overwhelming and confusing.
Investing can be a complex undertaking, so it’s understandable that there are questions about how investments work and what investment options are right for you. Here are some of the main fund management types:
A single-sector fund invests in one asset class, like Australian shares, fixed interest, or property. Some of these funds may also invest in a specific sector of an asset class. For example, a global share fund may focus solely on companies in Asia or companies within the Technology sector. These funds are professionally managed by one or more investment managers who specialise in a given field.
A multi-sector fund (also known as a multi-asset fund) can invest in multiple asset classes and can be professionally managed by one or more specialist investment managers. These funds generally have a different level of risk associated with them that determines what they invest in and how they’re labelled. For example, a Growth fund may have more exposure to higher-risk growth investments like property or shares, while a Conservative fund may have more exposure to lower-risk conservative investments like cash or fixed interest.
A multi-manager fund (often referred to as a fund of funds) is a single fund managed by multiple investment managers that each has its own investment portfolio. For example, a global shares fund may have three investment managers, and the individual investment portfolios of these managers each hold a percentage position in the overall fund – with Manager A making a 20% contribution, Manager B making a 30% contribution and Manager C making a 50% contribution to the overall fund. A multi-manager fund can also be invested as a single-sector fund or a multi-sector fund.
A single-manager fund can be invested as a single-sector fund or a multi-sector fund. However, this kind of fund is professionally managed by just one specialist investment manager based on the objectives they have specifically set out for the fund.
ACTIVE AND PASSIVE (INDEX) FUNDS
Both active and passive (or index) funds can be invested as single-sector or multi-sector funds and may also have a level of risk associated with them that determines what they invest in and how they’re labelled. Active funds involve active decision-making. They are professionally managed by one or more investment managers who strategically buy and sell the fund’s investments in a bid to outperform the market. Passive funds require less decision-making. They too may be professionally managed by one investment manager who chooses investments that aim to follow (or replicate) the returns of a particular benchmark – for example, the ASX 200 index for Australian shares.