LICS vs ETF vs Managed Accounts vs Managed Funds

Hi guys

I'm new to the forum and I'm intrigued by why LICs and ETFs are so popular on this forum, as opposed to say Managed Funds or Managed Accounts.

In addition, are most members buying purely Australian Shares vehicles? Whats the reason? Divvies? What about the lack of diversification at the asset class and sector level (banks and miners), high Au Shares P/E, market cap concentratiom (ETF) and yields being compressed?

Would be interested in your views and I apologise if this has already been covered!

 

Hi @bookworm.

You'll find quite a few threads in PC discussing the various shares and funds options. Personally, I go for LICs and ETFs because of the ease of transacting (ASX) and no minimum investment amount.

With my ETFs, I'm trying to ensure that I am getting into some that have foreign shares and across a range of sectors, but are Australian domiciled (easier for taxation purposes for us).

From my reading in PC, you'll find that there are as many different strategies and opinions as there are posters. I think it all just comes down to knowledge, interest, and end-goals.

Good luck finding the answers you're looking for.

 

Hi Bookworm,

Given your intrigue, I'll hand over to you to present the relative benefits of Managed Funds and SMAs as you see them, and then some members might like to discuss.

It's hard to know what most members are doing, but sector concentration, diversification, sovereign / market risk have all been covered in detail and it's fair to say that views are divergent on this - as one would expect on this type of forum.

 

Hi @bookworm

I was wondering much the same thing.

I am researching this atm. I am not a professional or anything close - just a worker so my thoughts may be way off.

Here's what I've found so far.
ARGO, MLT, AFIC roughly return 4% plus 100% franking so grossed up they are around 5.2%
BKI is roughly returning 4.5% which grossed up is about 5.85%

LICS don't appear to be set and forget as you need to participate in new share issues if you don't want your holdings diluted.

The ETF VAS varies depending on which source you can find but Vanguards 31 May 2017 fact sheet stated 4.1%> I am not sure but I believe they give somewhere around 75% franking so a little over 5% grossed up. They have a fee of ).14% so cost is $1,400 per million dollars invested - not sure if this is accounted for in the 5% or not.
The ETF VGS according to the May 2017 fact sheet gives 2.3% with no franking and the cost is 0.18% so $1,800 per million dollars invested.

Now for the interesting part.
Vanguard also have Managed Index funds that charge a .29% fee so $2,900.00 per million dollars invested.

Their Growth fund returns gave 9.13% last 1year, 7.15% last 3 years and 6.29% last 5 years and 5.39% last 10 years - see link to invest smart -
Vanguard Growth Index - Managed fund profile - Managed funds - InvestSMART
Apparently there are some CGT issues with this fund (which may be addressed according to a recent post by Austing (thanks mate). I am not sure how this actually pan out though.
Also 2017 is listed as having 10% franking so I guess you could ADD about 3% to the above returns - say the 10 year return goes from 5.39% to 5.55% grossed up (these are my rough calcs).

Vanguard also have a High Growth Fund as well
It's Investsmart stats are last 1yr 9.3%, 2yrs 7.8% ,3yrs 6.8%, 5yrs 5.93%, 10yrs 4.94%.
Link for this data Vanguard High Growth Index - Managed fund profile - Managed funds - InvestSMART
Franking is listed by Vanguard at 13.3% for 2017 so we can add almost 4% to the above returns - 1year 9.6%, 5yrs 6.16%, 10yrs 5.13%.
There are also some CGT issues with this fund but I am not sure of their impact/cost.

Even if the last 1year results on the Managed funds are unusually high due to the CGT event they still give a fair performance with a lot of spread. The High Growth Fund is 90%- 10% Growth/Income, and the Growth Fund is 70% - 30% Growth/Income.

What this all means I am not sure - Please do your own research as all of the above may be incorrect - remember I am an amateur who can't even spell. (Not advice etc).

 

Where is the post in regards to the CGT issue with vanguard diversified managed funds? Im looking at sticking a fair amount into the high growth wholesale fund. Thanks

 

A major difference is the cost - and we are not talking the costs of one compared to another as a 15% variance. The cost difference can be 20 times as high for one investment vehicle compared to another.

 

Just to quick note 4% fully franked is 5.71% as in the case of AFIC MLT ARG.
BKI 4.5% fully franked becomes 6.4%.

Divide yield by 0.7 to account for full franking

 

Thanks Snowball, I assumed franking credits added about 30% so I added this amount just goes to show how much I don't know. Just an amateur with NFA (No Financial Idea) doing my best.

I will seek permission from admin to amend my original post to correct the yields.

Credit goes to Snowball

 

Very interested to learn more about the vanguard wholesale investment options. Apart from what's written on the vanguard website, anyone have more info they could share. @austing ?

I will have 300k shortly and won't need it for 10-13years.

 

I can't give advice. But for a set and forget investor other than setting up a one off BPay for regular dollar cost averaging contributions they're an excellent product.

Importantly it removes you from the process helping to protect you from yourself.

This document detailing changes to their Diversified Funds from 1 July would be worth reading:
https://api.vanguard.com/rs/gre/gls/stable/documents/10508/au

With Vanguard opting into AMIT the CGT problem that occurred when other unit holders sold is no longer an issue. Read the latter part of the Vanguard thread from here:
Vanguard

If @Il Falco has the time he will be able to add some very valuable information on this area.

 

Thanks, will need to read through the thread. Hopefully it will explain the cgt issues as I'm not grasping it yet.

 

Where are you investing with a relatively attractive P/E at the moment?

 

Here are a few key points (not exhaustive):

Managed Funds
Pros

• Active management (can also be a con, as most active sector focused managers don't outperform the relevant index).
• In a multi-asset portfolio context, access to opportunities not readily available on the ASX (e.g. US listed ETFs, alternative strategies like unlisted private equity and 'niche asset classes/global sectors'), effective currency management and customisation of exposures - e.g. most other structures are either fully hedged or unhedged.
• Reduced administration and cost efficiencies when compared to direct securities - e.g. brokerage.

Cons

• No portability of underlying investments without CGT implications.
• No customisation.
• Relatively low level of transparency (this is improving).
• Generally an onerous application process (except via mFund).
• Inherit tax position of the trust (could be a positive if there are significant carried capital losses or negative on the flipside) - this should be addressed via new legislation relating to Attribution Managed Investment Trust. I touch on AMIT later.

Managed Accounts
Pros

• Direct beneficial ownership of underlying assets.
• Greater transparency.
• Portability of underlying investments.
• Potential tax advantages of ownership and no inheritance of trust tax position.
• Customisation.
• Reduced administration and cost efficiencies when compared to direct securities - e.g. brokerage.

Cons

• Inferior implementation - this is the biggest CON - e.g. cannot short sell, currency management and general hedging is limited.
• Largely constrained by what is available on the ASX (unless the Managed Account holds Managed Funds).
• Generally expensive, as you need to use a platform service to access these, which is an additional administrative fee.

Thank you for taking the time to provide this info. LICS seem to me like a closed-end managed fund structure, with strict corporate governance and less impact from the actions of other unit holders.

Spot on here - beat me to the AMIT comment. Without going into too much detail, large unit holders could historically generate significant investment activity such as large sales, which would trigger capital gains to other fixed unit holders. Joining the AMIT regime would allow the responsible entity (manager/trustee) of the fund to distribute more gains to the large unitholder generating the investment activity. This should result in greater unitholder equity.

Personally, I am:
1. building up my cash buffer for investment properties at the moment.
2. continuing to invest in a high growth diversified managed fund (using dynamic asset allocation, not strategic asset allocation like vanguard).

I know that the guys at my work like emerging markets (particularly South Korea and Taiwan) bonds and equities, US Healthcare, EU Financials at the moment. While being extremely underweight Aussie shares, they reconfigured the allocation and bought into CBA following the bank levy (my workplace is a value/contrarian shop).

For full disclosure, I work in the investment management industry (I'm responsible for an investment product department at a fund manager). I'm not here to flog product sales or push any specific structure or agenda as I can launch all structures (further, my bonus isn't driven by sales targets ). I have a keen interest in property (unlike a lot of people in my industry) and am here to learn from some of the experts here.

 

@bookworm

Thanks for that, you outline the pros and cons of Managed Funds and SMAs well. AMIT is certainly a game changer for Managed Funds and should make it easier to find capital for them.

Speaking for myself, for Australian exposure, the only manager I'd pay is IML for their small cap products. International, I wouldn't pay anyone.

In short, I do not see any value in the traditional investment management industry beyond sourcing factor exposure that I cannot get from index products. When looking at investments I am looking for very long term survivability, lowest cost and tax efficiency. I don't want to be changing horses midstream. Having been all over the park over a good number of years, you'll find me pretty much in the Dr. Bill Bernstein / Charley Ellis / Jack Bogle camp, with some adjustments for the local market.

 

The issue is that you are charged capital gains tax yearly

The last PRO for Managed Funds is incorrect. I avoid Managed Funds because of the high fees / administration costs. Buying direct shares is cheap as long as you buy decent sized parcels as there are no ongoing fees. See @Il Falco 's post above - who won't pay for a fund manager (except IML small caps) because generally active fund managers are a waste of money when you can buy index funds that perform just as well for a fraction of the fees. LICs also have low fees and other upside over index ETFs (read thread) which is why I buy them too.

 

Survivorship and recency bias are massive issues with active management - was their outperformance between an arbitrary start and end date, with no allowance for tax effects (!) a matter of key man, process or simple factor exposure? Is it repeatable? who doesn't know about it? Is it just simple probability that some must outperform at some point? (yes!) And if the manager truly is the 2nd Warren Edward Buffett what happens when he leaves your shop? And what about when your success leads to inflows that outsize opportunity set? And what do I do when you increase MER and or implement performance fees on a benchmark of your choosing and then proceed to underperform? What about when you churn the portfolio in order to hit the high water mark so you get your performance fees leaving me with a bunch of realised gains I now have to pay tax on?

All too hard and too many compromises inherent in the industry

Pass.

 

Is it possible to break this down for a simple person please. You guys are on another level and I don't think beginners have a clue what you're talking about.

Just as an example, If I purchased Vanguard 100k wholesale fund, and it increases 10% over the year, I will pay management fees of 0.29%. What capital gains tax would I pay if I'm not selling?

Appreciated.

 

Hi @bookworm,

Welcome. It's great to have someone here who's in the funds management industry. So although you're here to learn about property I'm sure this section of the forum will appreciate your insights from time to time.

I used to invest in property but as a retiree now I don't. I'm sure your knowledge of dynamic asset allocation and investing as a professional is why you're accumulating cash and ideally should be getting Line of Credits etc in place. No one can predict when the property cycle will turn down but turn it will. That does seem to be getting closer if history is any guide. It appears you are getting ready for the next stage of the cycle. I'm sure your patience will be rewarded.

Is the dynamic asset allocation product you mention similar to AMP Capital's product?:

http://www.ampcapital.com.au/ampcap...uments/fund profile/201704-profile-rdmf_x.pdf

Like @Il Falco I'm also a fan of IML for mid / small caps although I've gone the listed route with QVE.

It would be interesting to hear your views on International active product. Over the longer term survivorship and outperformance of the index appears to be very difficult. According to SPIVA over a 10 year period only 10% of International fund Mgrs outperformed the index. And it's highly unlikely that those that did outperform at this stage will be amongst the outperforners in another 10 years time. It would also be interesting to get your take on the SPIVA reports. I've seen investing professionals suggest at times that there are flaws in the compilation of this data but I haven't seen the supporting evidence?:

http://www.spindices.com/documents/spiva/spiva-australia-year-end-2016.pdf

Cheers

 

@bookworm it would be interesting to hear your view on smart beta ETF multi-factor product? Low volatility factors (as opposed to use of futures etc) to reduce downside risk but without compromising the upside shows promise. I'm more interested in International product as no matter what multi-factor product there is covering ASX it generally seems to be heavily concentrated just like the cap weighted index.

The problem is there is limited International factor product in Australia and what is here only has small FUM (admitadly product is new). And will niche product survive in our small market here? So it looks like wait and see. Perhaps a very long wait unfortunately!

Of course there are active quant funds in Australia but the fees are generally very high and product often not available to retail investors.

 

Just to clarify. I am not pushing any one product/share etc. I am simply investigating the choices from a lay man's(or woman's) perspective.

Bookworm the fund I mentioned is called the Vanguard Growth Index Fund, there is also a High Growth version with less in Fixed Interest/Bonds etc. It is basically a few Indexes (bonds, International and Aust). So not really a traditional "Managed Fund" - more a collection of indexes.
The cost is 0.29 which is cheaper than the Whitefeild LIC that some seem happy with (it may still suite some very well). The difference (for me at least) is that Whitefield are in the process of diluting their shareholders by over 10% by issuing new shares. If you aren't in a position to participate in the offered purchase you will be diluted. This is a worry to me.

The previous CGT issue was also a worry to me. Now its just a matter of Maths and risk spread.