Managed funds

Unlike a bank term deposit, the return you get from a managed fund will go up and down over time, depending on what it’s investing in.

Growth assets typically have higher long-term returns

‘Growth’ or ‘aggressive’ funds investing in higher-risk assets such as shares and property may be more volatile, but over time they typically provide a higher return. ‘Defensive’, ‘conservative’ or ‘balanced’ funds mostly invest in lower-risk assets such as bonds and cash. They are likely to have more stable returns but not likely to grow as much over the long term.

Below is an example of the return you might receive from managed funds. (Source, Investor KickStarter).

For up to date details about average returns go to Sorted’s Smart Investor.

Different funds have different return benchmarks

The best way to assess return is to compare it to a relevant benchmark. With managed funds, the fund manager chooses a market index to act as a benchmark. An active fund aims to beat the market index return, but they don’t always manage to achieve that goal. A passive fund simply tracks a market index.

Managed funds are regulated investments. We license the fund manager and their supervisor and we monitor they’re meeting the minimum standards required by law. But there are still risks to think about.

Funds with more growth assets will have higher volatility

Growth assets like property and shares go up and down in value more frequently than income assets like cash and bonds. Different funds have different mixes of growth and income assets.

You can't always access your money easily

Some managed funds allow you to sell your units daily, while others have less frequent options. You may also have to give notice. This can be days or weeks. For KiwiSaver funds, your money is locked in until the age of eligibility for NZ Superannuation (currently 65), with some exceptions.

Funds operated from overseas may have tax or currency risks

Investors in New Zealand may be able to invest in overseas managed funds through the Asia Region Funds Passport arrangement. This arrangement simplifies cross-border marketing of managed funds across certain countries in the Asia Pacific region.

It aims to create a regional market for collective investment schemes, making cross-border offerings easier across Australia, Japan, Republic of Korea, New Zealand and Thailand.

Under this arrangement, funds are registered in their home country, but follow the same set of agreed rules as other passport funds registered in New Zealand. New Zealand investors may benefit from the broader and more diverse fund offerings but should take tax advice and be aware of currency differences.

If you invest in any passport funds, you should receive an information sheet and a Product Disclosure Statement (PDS) to provide you with information about the organisation offering the fund, where it was registered, and any fees and charges payable.

Fees can have a big impact on your total returns over the long term. It’s worth comparing fees from more than one manager before you invest. Smart Investor shows the average fees for different types of funds.

Management fees are usually shown as percentages

You’ll pay a management fee which is usually calculated as a percentage of the fund’s net assets.

Be aware that small percentage differences can mask how much impact fees have in actual dollar terms. Use an online calculator, or ask your provider to help you work out the dollar amount you will pay in fees.

Other fees may also apply

Other fees may include:

• Performance-based fees – for achieving a return that’s better than the target return
• Other charges such as administration or member fees
• One-off charges such as exit fees
• Fees charged by a financial adviser

Active funds are usually more expensive

Active funds (that aim to outperform an index), tend to be more expensive than passive funds (that track an index) because they require more management and investment expertise.

PIE funds have lower tax rates

Portfolio Investment Entity (PIE) funds are a type of managed fund offered by banks that offer investors lower tax rates. There’s usually a penalty for accessing your money early, or in some cases, early access m

Review your managed fund investments at least once a year using the various reports your provider must publish. Even if you have an investment adviser, it’s important you read them yourself.

Check your fund update

Each quarter (or at least once a year), your fund manager will publish a fund update. This information will help you keep track of your investment and will include:

• the fund’s risk indicator (how likely it is to go up and down in value)
• returns over the past five years compared to a relevant market index
• the fees charged in the year to date
• how the fund was actually invested compared to the intended mix
• the top 10 investments that make up the fund.

Fund updates follow a standard format so you can easily compare the risk, return and fees of your fund to other similar funds. You’ll find fund updates on your provider’s website.

Read the annual report

All managed funds must give you a copy of their annual report, or a link to it on their website, within six months of the end of their financial year.

The annual report describes any changes made to the scheme in the last year, how it’s being managed, how investments have performed against the scheme’s goals, and if the auditor has raised any concerns.

We’ve created a guide to help investors find their way around annual reports. It explains what to look out for in the financial statements, what certain terms mean, and the red flags which may crop up.

You can request other information at any time

For example:

• an estimate of your balance
• the amount of fees you have paid
• full financial statements and any audit report*
• a copy of the most recent PDS*
• a copy of the Statement of Investment Policy and Objectives (SIPO)*

*These documents can also be found on Smart Investor