Managed Funds vs. ETFs vs. SMAs

Hey Guys,

Through my investing journey I have collected a myriad of Managed Funds, ETF and shares in individual companies.

Im thinking now of consolidating by selling single shares and buying some SMAs

SMAs - better than managed funds - Diversified Portfolios - InvestSMART

Specifically the Intelligent Investor funds as I like their ethos of value inversting.

Ill keep my managed funds and ETFs , especially the international ones and then monthly add to the managed funds and SMA

I realise I am paying around 1% fees for the managed funds and SMA and Im fine with that as automatic monthly payments hopefully reduces the biggest risk to my investments ..that is me.

Anyone see much downside in this arrangement?

Im hoping to keep an allocation of around 40% aussie, 40% international, 10% Property trusts and 5% bonds...god help me, i might even flirt with 2-5% GOLD ETFS.

 

@radson not related to your query however can I ask how do you select the MF. I am looking to invest MF for diversification from local shares but struggling to choose as there are many many choices.....

 

@SO805. Have a read of posts in this Other asset classes by @The Falcon and @austing. They know their stuff far more than me, so take my advice to follow with a grain of salt.

The most important consideration should be low costs when it comes to pooled funds. With the advent of ETFs and robo advisers there has been quite a substantial change in what pooled funds can charge the investor for the benefit for all of us. If you listen to the likes of Vanguard etc then we should invest in the lowest costs pooled funds which are ETFs. Think Vangaurd, Ishares, Betamax and SPDR etc. Overtime automatic indexing with low costs beat managed funds.

Check out ETF Watch - Australian ETF and LIC information.

Still, as mentioned I have managed funds. I like the ethos of value investing and like humans behind some of my investments. I like Johnson from Forager Funds, Douglas from Magellan and Kerr from Platinum. My like of these funds is subjective and not based on rigorous financial evaluation. Every payday, once a month a 1/3 of my salary goes... shooop ...into these managed funds, thwarting my tendency to impulse buy and acts of wanton retail therapy. My managed funds are to me, like a mortgage payment... but without the interest.

This financial year according to sharesight.com,Johnson's Forager Australia is up 8.35 %, Kerrs, Platinum Asia Fund is down 13.5% and managed funds have overall lost 0.53%. I am fine with that and each month...my pay will go ..shoop..all automatic, buying more units in this bear market, so that hopefully in 5-7 years time, I am well in the black.


Hope that ramble was of some use

Forager Funds - International and Australian Fund Manager
http://www.magellangroup.com.au/funds/magellan-global-fund/
Platinum Asset Management

 

Interesting. I can't see any great advantage/disadvantage over picking a LIC that meets your criteria. What are they?

All I can see is that an SMA is slightly easier/cheaper to change strategies. More transparent as you see direct holdings?

Am I missing something? I'm just learning about ETFs and LICs

 

Can't say I've ever been able to get interested in SMAs so I can't offer much opinion on them. Based on a very brief look It appears the above are mostly ETFs bundled together to meet certain asset allocation requirements (with the added fees). A number of new so called robo-whatever's seem to be taking this path And with anything new who will survive or who won't in this competitive world? I want to know what I invest in now is highly likely to be around in the long term!

The problem is with the addition of the SMA(s) you may end up with overlap with your existing investments.

Perhaps some simplification may be in order to minimise overlap but of course one has to consider the CGT impact. With careful tax planning over time and market conditions this might still be worth considering.

Other Options are:

If one is prone to "fiddling" and/or erratic behaviour with his/her portfolio then perhaps a regular auto-BPay into a traditional diversified managed fund could be worthwhile.

Given the struggle many active managers have trying to "consistently" beat the index then what about:

https://static.vgcontent.info/crp/intl/auw/docs/funds/factsheets/ret/vlshgf.pdf?20160212|092500

Seems to come close to the asset allocation you are after.

With the indexes covering the major asset classes locked in place as a "core" then you can take bets on active funds (satellite) if you choose.

OR (Beware my personal bias here).

1. Learn discipline:
1a. If you are hesitant about buying and/or prone to erratic behaviour then determine a recurring time frame and buy no matter what to keep your asset allocation roughly in balance. Sorry just re read your posts, it seems you have this under control.
1b. If you feel the urge to sell do as Peter Thornhill suggests, "take two aspirins then lie down for a couple of hours until it goes away" ( especially with listed funds)

2. Dicing and slicing asset allocation with small percentages of stuff such as 2 - 5% of gold, 5% of bonds and even 10% of property is not going to make a significant difference. Property is already in the main index anyhow by capital weighting. And tiny amounts of 2 - 5% of whatever just don't make enough difference to warrant their inclusion.

3. So with meaningless small percentages of gold, bonds and perhaps even property eliminated from your desired asset allocation that just leaves Australian and International shares. Hence an incredibly simple portfolio covering both "passive" ( core) and "active" ( satellite) could be along the lines of :

Australian Shares:
1. VAS (Top 300, index)
2. QVE (Ex Top 20, active)

International Shares:
1. VGS (Developed markets, index)
2. MFF/PMC (active)
or
FGG ("fund of funds including Magellan" - long only, absolute return, quant, developed, Asian etc and relatively low cost, active)

In summary though, if you are prone to erratic behaviour it may not matter how or who you invest with or even if you use a financial advisor. If it's in your nature you will find yourself chopping and changing investments regardless of how easy or hard it is to do so. How do I know this from a previous life? Bugger, did I have to make every mistake under the sun As hard as it might be my suggestion again is to become disciplined, be your own SMA! It is tough and like a drug addict/alcoholic you will fall off the wagon time and time again but eventually you will get there and be all the better for it.

Not financial advice, personal opinion only.

 

A few things with seperate accounts ;

- check to see if transactional costs are included in management fees, they usually arent.

- this leads to agency risk situation whereby the account manager has incentive to turn the portfolio over far more than you would normally do yourself (they clip the ticket on transactional costs). So beware naturally high turnover growth portfolios.

- there is value to be had in seperate accounts with strong methodology / rules. You don't want to be relying on a gun stock picker who will be gone in 2 years. Of all the model portfolios the one that personally would interest me is a separate account run per morningstars equity income portfolio, which is a very low turnover portfolio.

- having said that I am happy to manage my own account along similar lines, tax and turnover aware.

As usual Austings advice is good. If you are going to fiddle, you will be looking to fiddle with seperate account managers after 2-3 years of underperformance...this is common for "value" managers.

 

Hi Folks,

This has been a great thread for me to learn the basic differences among asset classes.

I notice some members in this forum recommended one of the many ETFs, VAS.
Using a simplistic view, I looked at the 1,3,5-year performance of VAS and there is no growth in the price. Got this from CommSec chart, Last closing price on 26 Feb 2016 is $62.17.
5 Year -> 1 Mar 2011 $62.49,
3 Year-> 28 Feb 2013 $65.30,
1 Year -> 2 Mar 2015 $75.25

Some facts I notice and my remarks (with only limited knowledge):
1. Quarterly income distribution -> This is a good thing.
2. Management cost 0.15% -> It's relatively low compare to a lot of managed funds (of course, I haven't look at too many of them)
3. Dividend of ~4.5% -> I think this is only average
4. Risk -> relatively low with diversified investments in various sectors and top AU companies.

If I may guess, people must be investing in VAS for #1 (quarterly income distribution), #2 (low management cost) and #4 relatively low risk and diversified portfolio.

Now I want to know if they invest mainly for the dividend or growth as well? or how is investing in VAS is a good strategy to achieve their goals?

Cheers,
IBP
Edit: management fee is 0.15%.

 

You pointed out the main reasons why it is a good buy and hold for a number of people. Looking at a 5 year period the dividends put you ahead in a flat market and if you use DRP over the long term you have steadily accumulated your wealth and income, compounding growth is the secret.

VAS will be my next purchase, hopefully later this year.

 

Thanks Hodor. From my research on VAS, I also lean towards the only reason to invest is for dividend. However, around 4-5% returns is not overly exciting.

In comparison with ANZ (may I say one of the blue chips) returns about 7% and no management cost. Although, it's not as diversify as VAS. The principle of dividends and compounding growth, why would anyone not accumuulate enough of ANZ which will return more dividends. Also if the SP for ANZ is low enough, the return will be > 7% which easily outweigh the return from VAS.

 

Long term wealth creation is seldom very exciting in the early days

Re your plan with ANZ ;

- What happens when dividend is cut by 50%
- Share price falls a further 30%
- There is a dilutive capital raising whereby you must make another investment of 25% of your invested amount otherwise your investment is effectively diluted by not taking part.

A combination of all three things could happen. How do you think holders who paid $37 for ANZ a year ago feel about its yield. (hint, they will be lucky to see 5% on their cost and are looking at 40% capital drawdown).

 

Thanks Falcon.
Re: the 3 points you indicated that could happen to ANZ or direct shares, does it mean it could not happen to ETFs equivalent like VAS? or do you mean the severity when those things happen to VAS, they won't be as severe as to direct shares? If the latter, I would think it should fall under the risk category.

 

Understand that it could happen to any vehicle holding ANZ. ANZ is approx. 5% of VAS. So the impact to VAS is 5% of what your exposure would be if you held ANZ directly.

 

Thanks Falcon. I do get this.
However, my question was more relevant to your comments in regards to the dividend cut, fall in share price and dillutive capital. Do you these 3 scenarios could not happen to VAS in general?

 

The direction of my comments are to your assertion (If I read it right) that ANZ is a no brainer vs. VAS for wealth generation. I am showing you the stock specific risk you take when you make that choice. Understanding that in the short term, the market prices stocks about right.

 

Yup no worries. I have actually identified 4 points why people would invest in VAS and point#4 relatively low risk with diversified investments in various sectors and top AU companies.

If I could answer my own question: Why invest in VAS?
Mainly 2 reasons:
1. Low risk with diversified investments in various sectors and top AU companies.
2. Reasonable (4-5%) dividend paid quaterly.

Let me know if I missed out any other obvious reasons.

 

Both actually or should I say "dividend growth". If dividends can't at least maintain ones purchasing power overtime then may as well go for bank interest with next to no risk.

Do you believe in human enterprise and the future of Australia? If so the sharemarket is a great place to participate in this prosperity being "growth and dividends". And don't think for a moment that if the sharemarket goes caput investment property will save you. So unless you're a great stock picker/trader then long term accumulation of the market itself (VAS is close enough being the ASX Top 300) overtime whilst keeping fees minimal is a low stress, extremely time efficient and close to set and forget way to go about partaking in its wealth creation. And surprisingly this passive approach will outperform many active investors/funds with consistency over the long term for bugger all effort and knowledge!

The older LICs are another option (ie broad diversification across the market held long term) but be aware of discount/premium issues. As an exercise in the reliability and growth of dividends check out the major LICs such as AFI, ARG and MLT's dividend growth over many decades. Hard to believe that such simple long term, set and forget investing in what is considered risk assets can reliably grow ones income well above the rate of inflation overtime.

In summary index ETF/funds and somewhat index proxies being the older LICs requires bugger all time to acquire and manage investments leaving one free to enjoy life, maintains purchasing power to keep us in the life were accustomed to as we age, SANF wonderful, easy for benificiaries to understand and manage when I depart this world and when you finally understand the reliability of dividends as opposed to the volatility of share price what more could you ask for in an investment. Personally I love it

Not advice, personal view only.

 

I agree VAS stock hasn't done much over the last 5 years. You have to try and dig deeper as to the reason why this has happened?

Resources and mining services industry which accounts for decent size of our index has been in freefall due to commodity price slump (particularly iron ore, oil and natural gas). Once there is bottom found and prices start to recover as demand/supply balance is restored you would find lot of resources stock to bounce back very rapidly. The timing would be hard as it all depends on when demand/supply balance is restored.

Secondly, VAS in my opinion is not income biased index etf so I wouldn't invest in it for income only. With VAS over long timeframe 5-7years expect around 4% CG along with 4-5% income.

Having said the above I believe VAS around 52 week lows and no CG over last 5 years is a good buy at current prices for the long term investor.

Management costs for VAS etf is 0.15% not 0.5%. See here

Investing in VAS for me is low risk, hassle free strategy with satisfactory returns (CG and income together) over the long timeframe.

Cheers,
Oracle.

 

Thanks austing, very informative post. I have no question on the dividend, quite attractive indeed.
But for growth as I mentioned in the past 5 years, it was not impressive. If CommSec allows me to look at 10/20 years, I would but it's just not available.
PS: oracle has also correctly highlighted that growth was not impressive but it may represent a good buy.

Very much appreciate your response oracle. Finally someone has responded to my question and all very make sense to me now.

Yes you're right. I misread it.

 

What you are saying is the overall Australian stock market (VAS) is level to what it was 3 years ago. Well, yes it is the case - you may have heard the stock markets not performing very well lately especially in the mining and resources sector. So your question is like saying: "Why do people invest in the stock market? - there has been no growth over the past 3 years!". And there are many answers for why people invest in the stock market. Whether you look at VAS or another ETF tracking the index is irrelevant. Markets go up and down and sideways that's just what markets do. When people are advocating purchasing VAS, they are advocating first and foremost the index investing approach (that is what @austing has referred to: invest across the whole market rather than picking your own stocks). It just happens that VAS is a reputable, low cost ETF provider for this index investing approach. But the whole reason why people are choosing to invest in VAS is because they are pursuing the index investing approach, not because of VAS itself.

Comparing this to a single holding like ANZ is completely irrelevant - the 2 strategies are diametrically opposed.

I hope this makes sense.

 

If you had invested in VAS on 28 Feb 2006 you would have returned 8.11% p.a.