Many miss out on managed funds as they stick to old ways 11th May 2002

Annette Sampson - The Sydney Morning Herald Online

Getting down to business ... investors who used financial planners were 50 per cent more likely to have managed funds in their portfolio.

Education is seen as the key to investing in managed funds. Annette Sampson reports.


A profile of Australian investors has shown that many people still lack understanding of managed funds. While investors who use financial planners are likely to have their money professionally invested, the recent Challenger/ASSIRT proactive investors survey has shown other investors are more likely to use direct investments such as shares or investment property.

ASSIRT interviewed 2000 Australians and found 44 per cent have assets outside super or the family home. Of those who own other investments, 78 per cent have shares, 54 per cent have cash or fixed-interest investments, 44 per cent have managed funds and 36 per cent have investment property.

The good news is that the diversification message is hitting home. Only a relatively small number of investors had only one investment, with the majority having their money spread across two investment types of more.

But John Barry, the executive director of Challenger International, says the survey also showed a need for continuing education and advice.

He says 38 per cent of investors said they knew little or nothing about managed funds. These included investors who had managed funds in which they may have invested simply on the advice of a financial planner. Around half of the investors with little or no knowledge of managed funds claimed to know as much as they would like to know.


''There is a concern that people don't have managed funds or shares because of a lack of knowledge and information," says Vanessa McMahon, the market research manager at ASSIRT.

''It's a problem if people are investing on limited knowledge and may not have the right investments for their needs. Investors need to be fully aware of all the choices and have an understanding of their pros and cons."

The survey found 72 per cent of investors seek the advice of an independent expert, such as a stockbroker or accountant, when making investment decisions. Forty per cent specifically seek the advice of a financial planner.

But when it comes to managed funds, investors are more reliant on their advisers. Advice from a financial planner is sought by 60 per cent of investors who use managed funds, but only 24 per cent of investors who have no managed funds. Looked at another way, McMahon says investors who used financial planners were 50 per cent more likely to have managed funds in their portfolio. Just over three-quarters of financial planning clients own managed funds.

Managed fund investors also claim to rely more heavily on advice. Almost 60 per cent of people who claim to be totally reliant on expert advice own managed funds, compared to just 20 per cent who own investment property.

All of this suggests that, for many investors, managed funds are still unfamiliar.

Peter Thornhill, the principal of Motivated Money, believes a lack of education isn't only an issue for managed fund investors.

''A lot of investment decisions are being made blind," he says. ''If people want to buy shares they will go and see a stockbroker. If they want to buy managed funds they'll see a planner. The role of the planner is to educate investors so they know what they're doing when they make their own choice. But a lot of people want the planner to make their choice for them, which they must not do."

Thornhill says the essential knowledge that every investor needs is an understanding of each asset class - shares, property, cash, and fixed interest - and the outcomes of investing in them.

''People have to understand those outcomes are perfectly rational over the long term. But in most cases, their time frame is much too short and investors see the markets as being irrational.

''If investors don't get a better return from shares than other investments over the very long term we're all doomed. That's because productive enterprises are the driver of the economy."

Thornhill says managed funds offer two main advantages over direct investments. While an investor probably won't go wrong by investing in shares in a good quality company, he says, they tend to become very focused on the ups and downs of the share price. There's also a danger of losing a large percentage of your investment if something goes wrong.

''Managed funds introduce diversification and eliminate those stock-specific risks."

But he concedes there are sophisticated investors who can read a balance sheet and are capable of making their own investment decisions who can avoid the fees by doing it themselves. He warns, however, that time is also an issue. ''Trying to do everything and doing nothing well is a sure path to mediocrity."

Thornhill says managed funds can also fill gaps in your knowledge. In his own case, he invests directly in shares that are ''no brainers" - quality blue chip industrial companies. ''But managed funds are useful in giving me exposure to medium- and smaller-sized companies where I don't have a hope in the world."

Online brokers are also trying to fill the education gaps. ''In the last 12 months we've focused on education because Australians typically start off with share investments and migrate into managed funds," says Karen Buck, the managing director of TD Waterhouse. Buck says the firm has developed portfolio planning tools to help investors identify the type of funds that will suit them, and offers a recommended list of the better performing funds.

She says TD Waterhouse customers now have around $300 million invested in managed funds (not including cash) and it is becoming a bigger part of the business as more share investors move across. ''It's a good way to diversify," she says. ''We also find a lot of our customers are using funds to get into the international markets."

Commonwealth Securities chief operating officer Michael Blomfield says many of CommSec's customers are new to managed funds, but having made an initial investment they are likely to buy more.

''Over half of our client base are now investing in both managed funds and shares because they see the benefits of diversification," he says. ''The vast majority don't have financial planners and the two key drivers for them are brand and performance."

These investors had a thirst for education, with visits to the CommSec online learning centre doubling in the past three months.


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