Managed funds come in many different shades and shapes. From low risk capital guaranteed funds, to specialist leveraged equity funds. There are a wide variety of managed funds available to the Irish investor, which either as individual funds or in a group of funds, will make up a large portion of an investors portfolio.
A managed fund will have a collected pool of investor’s capital, which will be used to invest in investment assets. An investor gets a share of the collected fund relative to the amount he/she invests. The method used to allocate the investor’s share of the investment fund, is to split the fund into a number of units. The number of units allocated to each investor is related to the value of the capital invested in the fund by the investor. The units will have a value determined by the value of the overall fund.
The fund will typically have an investment manager, who decides on how the fund invests and manages the assets within the fund.
Each fund prospectus should outline the investment management style that will be adopted by the fund manager. It is possible to group management styles into four groups. The style adopted for each fund, will have an influence on the management charges set by the product provider and should also be seen as a factor on the likely risk / return.
Passive Management – This investment management style attempts to achieve average market returns. In many passive funds, the equity mix held by the fund mirrors a given index. For example, an Irish equity tracking fund will hold shares in the same allocation as the published ISEQ index. The management charges for a passively managed fund should be lower than funds with an active fund manager.
Consensus Management – This investment management style attempts to achieve the same returns as peer managed funds. So if the average managed fund has a mix of 50% equities, 30% bonds and 20% cash, then a consensus fund will attempt to mirror this asset allocation. Potential returns will be around the average for managed funds.
Active Management – This is where the individual fund manager decides which asset classes to include in the fund and how the fund will be allocated across those asset classes. The fund manager will then choose for each asset class; the stocks, the properties, the bonds, the commodities, the fixed interest securities and cash level which will be held within the fund. The fund manager’s objective is to beat the relevant indices for the assets held within the fund.