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Give your portfolio a head start

Research has found that high management fees can eliminate a large portion of a fund’s overall return, and greatly reduce the value of a long-term investment.  In this article, we explore other alternatives for investors seeking low cost investment portfolios.

Do you know how much you are paying in management fees for your investments?

A recent study by Standard & Poors in the US found that, on average, funds with lower management fees have outperformed their more expensive peers.  In Australia, this is also the case where returns from low cost funds such as Listed Managed Investments (LMIs) continue to surpass other managed funds.

When selecting a managed fund, investors usually consider the fund manager’s track record, background, and investment strategy. However, sophisticated investors will also research how much they will need to pay in management fees.

In a market environment where returns are expected to be single digit, DIY superfund investors and those with long-term investment strategies should pay close attention to the amount of fees they are paying. 

High management fees can eliminate a large portion of a fund’s overall return. Research has found that over a 25-year holding period, managed fund fees can reduce the value of your investment by up to 20 per cent.

Investors without the time or funds required to build a diversified portfolio of shares or property, should consider Listed Investment Companies (LICs), Exchange Traded Funds (ETFs), or Property Trusts. In comparison to other managed investments, these vehicles have become an attractive alternative, since management fees can be significantly lower.    

LMIs have traditionally been a low cost investment. Typically, management fees range from 0.20 per cent to 1 per cent per annum as compared to 2-4 per cent for well-known managed funds. On a $50,000 investment, this equates to $70 to $400 in fees in the first year of investing in an LMI, compared to over $900 for an unlisted fund.

LICs in particular have attracted much attention as investors seek low cost investment portfolios.  In the last year there has been 13 new LICs as compared to 2 listings in the 5 years prior.

Currently there are 5 new funds that are seeking to list on ASX with a variety of underlying exposures. Maxim capital and Aspyre Capital Investments will provide investors with a diversified portfolio of Australian Shares. Heemskirk Consolidated on the other hand will take direct equity stakes in listed and unlisted companies with mining projects and operations.  

In the technology space, Acrux will be investing in healthcare products and drug delivery technologies, while Advanced Funds Management will have an investment portfolio with ventures representing a cross section of innovative technological solutions.

Acrux Limited and Advanced Funds Management will benefit from a Pooled Development Fund (PDF) structure, which allows the fund to only pay 15 per cent, rather than 30 per cent corporate tax. Investors in these PDFs will also benefit from no tax on any capital gains or income.

Investors can buy and sell LMIs in the same way as other shares through their broker or financial adviser.  A good source of information including prices, research, news, annual reports and announcements can be found at www.asx.com.au/LMI.

© All rights reserved 2004. This material is educational and it is not intended to constitute financial advice.

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