Individual investors make choices based on the assets they purchase and the timing of when they choose to sell them. Many investors, especially large-scale investors with significant amounts of money to place, don't ask "what shall I invest in?", but "how should I organise my investments?"
A managed investment fund is one of the earliest forms of investment organisation in finance. For those seeking a strategic plan regarding wealth creation, it is very important to understand how a managed investment fund works (including what makes up a managed fund), and why it has become such an attractive option for many.
Here we have director, Martin Robinson, to discuss what a managed investment fund is and how they are used to generate wealth.
Simply put, a managed investment fund is a collective investment vehicle. Multiple investors provide their capital to create a common pool of funds. The common pool of funds is then managed by a professional fund manager using a specific set of investment guidelines.
A managed fund manager typically determines how best to allocate the common pool of funds among different asset classes, geographic regions, etc. based on the investment objectives specified in the mandate.
"A managed fund is not merely a collection of assets. It is a methodical process. It represents the use of consistent decision making processes throughout various economic environments."
Upon providing capital to the fund, the capital is placed into a single pool. From there, the fund manager will determine how best to allocate the capital among other asset classes, regions, etc. depending upon the mandates.
The advantages of managed funds lie in the fact that even small contributions allow the investor to participate in a larger, potentially diversified portfolio that may be difficult to build and maintain through independent investment. The fund manager handles the day-to-day tasks associated with operating a portfolio including conducting ongoing research, executing trades, reviewing performance data and rebalancing the portfolio. The investor remains invested in the potential returns.
Each managed fund has its own distinct mandate. The mandate outlines the rules for how the fund manager manages the fund (e.g., the types of securities that may be held in the fund, the amount of risk that may be taken by the manager, and/or the performance benchmarks against which success will be measured).
In addition to setting out these rules, a fund mandate also acts as a form of discipline. A good example is a managed equity fund with an equity focus mandate. The mandate allows the manager to adjust their holdings based on changes in market conditions. Without a mandate, an equity focused manager could easily drift towards other areas of the market if they were to see more compelling opportunities elsewhere, or be pressured by short term market volatility or emotional responses.
"In essence, a mandate is what distinguishes a strategy from a whim. By virtue of having a mandate, investment decisions are made based on a pre-determined framework and not on the whims of current market conditions or personal opinions/feelings."
Many people equate a managed investment fund with active management. While both are related concepts, not all managed funds are actively managed. Active management implies continuous decision-making, position adjustments, and an ability to rotate into new sectors quickly. In reality, this type of activity takes time, skill, resources and knowledge to effectively execute.
While there is no guaranteed outcome from active management (i.e., no structure removes market risk) and while there are certainly times when an actively-managed fund does poorly, active management seeks to add value to investors' portfolios through the systematic and disciplined application of experience, research and judgment in allocating capital during changing market conditions.
Another area that is not always apparent but highly important is the overall approach that a managed fund uses to manage risk. Individually, many investors (especially those who do not work professionally with investments) tend to underestimate risk during bull runs and exaggerate it during bear runs.
A well-designed fund incorporates risk management into its general operations. Tools such as position size restrictions, sector concentration limits, stop-loss orders and regular reviews of a portfolio are used systematically as opposed to reactively. While eliminating all possible loss is impossible, a well-designed fund attempts to limit the magnitude of any losses that do occur.
"Risk management is not limited solely to periods of extreme stress. Rather, it is a component of a properly run fund that operates consistently regardless of prevailing market conditions."
By design, managed investment funds can theoretically serve almost any class of investor. In practice however, they are most effective for those whose wealth has grown sufficiently that they now need to consider how best to manage their wealth.
In particular, managed funds offer smaller investors the opportunity to benefit from the expertise, infrastructure, control and support provided by experienced professionals, something which can be very difficult for smaller investors to achieve on their own.
Ultimately, the benefits come not from the assets chosen, although clearly choosing high-quality assets matters greatly, but from the process by which those decisions are made and implemented over time.
There will inevitably be some degree of uncertainty in markets. Economic conditions fluctuate. Political developments can impact investor perceptions in unpredictable ways. Sentiment can shift rapidly. A managed investment fund does not remove uncertainty from your investment decisions. What it does provide you with is structure.
Structure enables decisions to be made inside an accepted framework rather than reacting emotionally to current market trends. Structure means that risk is addressed as a function of process rather than relying on instincts. Structure also means that each time the manager allocates capital, whether it is for growth or income purposes, they are doing so in pursuit of achieving long-term wealth goals for clients.
For individuals committed to creating wealth, learning about what constitutes a managed fund and understanding the basic principles behind managed funds, represents an important first step toward taking on your financial future with more clarity and intent.
At Amzonite, we are a specialised managed investment fund for private investors who are ready to take a more structured approach to their wealth.
Disclaimer: This content is for informational purposes only and does not constitute financial, investment, or legal advice. Past performance is not indicative of future results, and all investments carry risk. You should always conduct your own due diligence or consult with a qualified financial advisor before making any investment decisions. Amzonite does not provide personalised financial advice and any strategies mentioned are illustrative and general in nature.
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