I recently wrote an article about why I use managed funds in my portfolio. I received several emails along with feedback on our podcast about why investors steer away from managed funds. I think that many of the reasons given are entirely valid.
Managed funds have been replaced by ETFs for a larger portion of self-direct investors. Many investors have simply decided that ETFs are the better fit for their circumstances. I think this is important. We are all different and we need to find what works given our unique situation. Every message that I received was with good intentions – to get me to see a better option.
I think it’s important to give some additional context to my choice.
A pathway into the market
Firstly, I started using managed funds when I was earning $56,000 a year. I was living out of home in Sydney, which was a financially challenging endeavour. I had student loans with compulsory payments, and I had very little discretionary spending or room for saving. Most weeks, I was only able to put aside $50 – $100. I really had no viable option to invest these small amounts. At the time the ETF industry in Australia was comparatively nascent. Brokerage was more expensive, and fees weren’t as low as they are now.
Managed funds offered me an option into the market. They allowed me to start investing my money immediately. It allowed me to build discipline and a habit to consistently invest much earlier than other options.
My situation has changed. I earn more, and I have more left over to invest. I have the ability to consider other options outside managed funds.
Many investors, or potential investors, do not. They often feel that investing is out of reach for them. The median salary of $65,000 is closer to the salary I was on when I first started investing. Cost of living is crushing most young people who feel that saving and investing is a fruitless endeavour. Managed funds offer an alternative to put their savings to work.
One of the main arguments that I heard from our readers and listeners are the tax consequences that an investor would incur with managed funds. My counterargument is that for many low to middle income investors the tax consequences are secondary to not being able to invest in the first place. Plus, for many of these investors their marginal tax rate is lower.
Efficiency for efficiency’s sake
I now have the ability to invest in larger parcels with listed assets – and I do. I invest in ETFs as I called out in the article. When I laid out my investment strategy, I explained that at its core it is controlling what I can control. Lowering costs like fees and taxes, limiting poor behaviour, investing as much as I can into the market. Most of these goals can be fulfilled with ETFs.
I believe that fees are important. ETFs typically have lower fees. I believe that minimising tax costs are important. ETFs do have the upper hand over managed funds in this aspect.
As I mentioned in the article, the investment product market will continue to innovate and there will always be better and lower cost products. I strongly believe that switching investments every time one appears – and incurring transaction fees and capital gains taxes – will put you in a far worse position. It is a balance, and I know that as my portfolio grows, the ratio of my assets in ETFs will increase.
It does not mean that I will sell my managed funds. They suit the other goals of my portfolio. They allow me to invest as much as I can into the market. The funds I have left over at the end of my paycheck go into my managed funds. They are a vehicle that helped me to start investing in the first place and now ensure that I maximise how much I am able to invest.
Managed funds may also be a good solution for investors that are prone to overtrading. Mark has recently written on how detrimental this overtrading can be to your returns. Managed funds have ‘speed bumps’ like delayed unit pricing and longer withdrawal times that discourage investors from trading in and out of funds.
I am the first to admit that I am a nervous investor. My anxiety about markets presents in an interesting way. When markets are down, I’m quite comfortable just following my plan and getting as much money invested as possible. However, when markets are up, it is more difficult for me as I have to resist the urge to sell, harvesting my gains before potential impending doom. Funds limit this behaviour and help me stay invested over the long term. Reaping
Final thoughts
I agree that there are some obvious disadvantages to managed funds. Yet, I can’t help but look at my own perspective and where I would be as an investor without them. I would have started investing later. I would not have exercised the investing muscle that allowed me to develop good habits with saving and investing. A large cohort of low to middle income Australians could benefit from the low barriers offered by certain managed fund providers.
Your portfolio is meant to evolve as your circumstances change. For long-term investors, this is inevitable. I am in a fortunate position where my income has grown and other investment products also make sense for my circumstances now. For many working Australians who are not able to invest in lump sums, managed funds may be a good option to help grow wealth. I used them and still do.
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