The Great Debate! Managed Funds vs ETFs vs LICs...what they are, how they work and what's best to invest in

The debate!

(it’s not time for a math debate, there will be numbers)

Please do listen to our episode “Pay yourself” first

The choices are: Managed Funds, ETFs, LICs

What they are and what they do Features and what works best Who will win?

Disclaimer – Full disclosure, I own all three types. Bought shares first, Managed funds about 6 years ago (tech super longer), ETFs and LICs in past 3 years.

Introducing the contenders:

Managed Fund – more managed funds than shares on ASX. 31 December 2017, the managed funds industry had $3,389.6b funds under management (FUM), not FUN, FUM, fun for managers for fees. But some are worth it. Structure - Unit trust Price– Net tangible assets. All shares in UT are worth $1,000,000. units 1,000,000 = $1 Units Underlying investment  ETF Structured as managed funds, but on the ASX – Unit trusts – Income and FC flow through based on holdings. Dividend may not be FF Price – Supply demand, but - Net tangible assets. All shares are worth $1,000,000. Shares 1,000,000 = $1NTA Underlying investment  LIC Structured as company – Income determined by board, FC usually paid (due to tax) Price – Net tangible assets. All shares are worth $1,000,000. Shares 1,000,000 = $1NTA Underlying investment – Mostly shares – Different segments – small cap, styles

Company V Trust – one has discretion, one is a flow through – value is the same, vs other company

What are they? - Features

How are they traded and when? End of day - MFs Intermarket - LICs, ETFs

Diversification Index - Lots of shares, top heavy Active - 30-150 shares, select sectors/styles Asset classes - Managed funds allow greater access to alt. investments Costs MERs – percentage-based cost 1% of $100 = $1 passive MFs same as ETFs 0.18%, Active 0.8-1.4% p.a. – LICs/MFs Platform costs – Admin fees %, plus flat, sometimes built into platforms (AMP) Transaction costs – per $1,000, each year Buy sell – 0.2% = $2, 1 year = $24 Brokerage – $20 = 2%, 1 year = $240

 

Investment styles

Active Passive Target investments Performance/Volatility

Winners:

Managed funds – transaction costs, investment styles, diversification ETFs – MERs, off platform, index diversification LIC – Investment style

Losers

Managed funds – MERs, platform costs, ETFs – brokerage LIC – brokerage

In the end:

How much will you invest? For how long? What is the end goal? How risky are you? – Costs and volatility – reduce your performance How active do you want to be or hands off?

 

Summary

I like all three – this is what I do...

Managed funds – use for smaller monthly investment – as $100 minimums per fund. LICs – invest into when dividends come in ETFs – same as LICs - invest when dividends come in.