EFT's, Managed Funds and Listed Investments - When to get in or out?

As we come out of lockdowns and get back to investor conferences and presentations ETF’s will be part of the opportunity you may want to take up. This is also a comment to the blog post some time ago by @Navarre (April 2021) which you can find here Direct vs. Portfolio Investment: We Weigh Up The Pros & Cons

ETF, LIC and Managed Funds all operate slightly differently and generally have different fee structures associated with them.

Typically Managed Funds are at the higher fee end. They can move in and out of the market (aka hold cash) and rely on the skill of the manager to get returns. The most important thing to understand what theme they are investing in is, what the fee structure is and how it is applied. Fees can be quite high. Typically there are fees to get in, fees to get out and fees for being in it. If the market goes down and then back up again, how are the fees applied? A managed fund is not a set and forget solution you still have to keep track of the managers performance and those fees. I think my father used to think managed funds were a lot like owning a race horse - everywhere there is another fee. It’s helpful to also know what the managed fund is invested in. Though in a managed fund you are expecting a bit more movement on the portfolio. I have a few Managed Funds in my time - mixed success. I’ve had a bit more success owning the funds manager than being in the fund themselves.

LIC (Listed Investment Companies) are a little bit more stable. They can fly to cash but generally remain long term investors. Brokerage is the fee to get in and out of them as you buy on market and each month at least they tell you what they hold and what the Net Asset Backing Per Share (NTA) is which you can compare to the market price. If the Market price is below NTA then you purchase at a discount, if above you’re paying a premium. Generally the fees are published in the annual report and are generally quite low.

ETF’s are a similar in many ways to LIC’s except they are generally FULLY INVESTED so will more closely follow the market. That is probably the key difference between and ETF and LIC. As an ETF gets more money in its invested straight away. Like an LIC they are more long term investors. One of the great things about ETF’s are you can get an ETF on almost anything, Commodities, markets, themes, combinations within geographic areas, even markets going down. Again holding the manager of the ETF’s is often not a bad strategy either.

What all of these products do is offer instant diversity in what you pick and that is its strength and weakness.

Consider Monopoly. It’s a realestate game but based around probability. At the start of the game Railways and Utilities are quite important as they can provide fast cash. Once all the properties are sold or more specifically once people start to build houses, the rent you receive from a player landing on a property with houses is much greater than landing on railway even if you own all 4 of them. So smart players at some point will dump the railways/utilities get cash and switch their investment into houses. ETF’s, LIC, Managed funds work in the same way…

If you’re starting out or investing in a new market ETF/LIC/MF are great ways to get instant exposure to the market. It’s quick. low cost and instant diversification. But when you start to directly hold shares in that sector or market the value of holding the ETF declines. Say you have an ETF or LIC in a particular market. Look at the top 5-10 holdings. If you also hold say 3 of the top 5 holdings directly, have you just doubled down on what you have already invested in? That is the trap.

Once you start investing directly in companies then you should review your ETF/LIC/Managed Funds to see they are still valid and perhaps its time to start to sell down the ETF etc and keep that diversification valid. There is no hard and fast rule here. How and when you sell down is dependant on many factors including the relative size of the holdings, the total portfolio size and the tax outcome of disposals.

This is where Navexa comes into its own where you can see what percentage your holding and particularly become important when you’re dealing with multiple portfolios (Personal + SMSF) or where you are looking at a family group.

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This is an absolute master-class - well writ @Mike!!

What do you mean when you say “owning the funds manager”?

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Hi @nick glad you liked it… All of these are examples and not a recommendation. I have or currently holding all of them. Not every post is a winner!

In the Australian example MFF.ASX is a fund where MFG.ASX is the manager and while both have had their problems over recent days. But we are talking about the process not performance.

You get a similar out come with Blackstone (BX.NYSE). Blackstone Inc. is a company in the U.S. stock market and it is a holding in 134 U.S.-traded ETFs. BX has around 28.8M shares in the U.S. ETF market. So you could purchase one of the ETF’s or the fund manager being BX.

Blackrock (BLK.NYSE) you know all those iShares listed in Australia. effectively they are all funds. The manager is BLK.NYSE.

Remember the funds invest in the assets they have been set up for, Where as the manager operates the business of being a Funds Manager and picks up the fees for running the funds.

Just like shares some managers are better than this than others.

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Hi Mike,
Thanks for the article, it was ery detailed and informative. One of the other important uses of Navexa when trying to decide on a fund manager, ETF or LIC is to enter a mock holding and back date it say 5 - 10 years and compare its performance with other LIC’s or ETF’s you are considering. You can quickly see who has had the better performance over time. I know that “past performace is not an indicator of future perfomace” but if an investment has performed well compared to its peers over a sustained period that is a good indicator of the funds management competence. It’s not the ony thing that should be considered however for me this is an important factor. I used to do this on a spreadsheet and spend hours on the net gathering information from each fund managers website to compare…not advice, just one of the ways I assess where to invest.

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Great point @Vince. One of the other less subtle things to look for is when the manager changes or when there is a change in policy about what’s invested.

I was invested in Contango a few years back as they tried to invest in small caps they were CTN.ASX. In Dec 2016 they changed their name to NOAS Small Caps (NSC.ASX) and with the change of name came a change of manager as per the Switzer report of the time (Click on the quote for their full report)

> Also, just before Christmas we saw Contango Microcap LIC (CTN:ASX) change its name to the NAOS Small Cap Opportunities (NSC:ASX) owing to CTN shareholders voting for NAOS Asset Management to take over as the investment manager of the LIC. This brings our LIC universe to 9. Interestingly, 7 out of the 9 Microcap & Small Cap Focused LIC’s were launched in the last 3 years

If you look at the graph

You’ll see post 2018 it tanked. A new manager is much like a new coach in football. All of a sudden you decide that you have the wrong players (stocks) so you ditch (sell) them but new players can take a while to fire up. Particularly in the small cap space.

So just as important as the graph is the announcements behind the numbers. Now that Hamish Douglas (MFG.ASX) has gone on - Medical Leave - it will be interesting to see how that plays out on the manager’s performance. Chris Mackay who managers (MFF.ASX) will take an oversight role in the short term.

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CBAPK is the new Perls XIV listing that CBAPF will roll into… BUT it’s a new deal - Do you take up the offer or cash in?

Note: The rules have changed and roll overs are not automatic you either need to be a Sophisticated Investor or have received advice…

I’m not licensed to give advise so take this as more highlighting to you some choices. What follows are my own personal decision criteria that maynot relate to you.

The details of Perls XIV (CBAPK) can be found here. Note the interest rate margin is between 2.75% and 3.0% but the first call date is 2029… CBAPF had a margin of 3.9%

The one thing I’ve noticed is the margins are getting lower and the call dates are getting longer… While this is a great deal for the bank with interest rates set to rise in the general market the 2029 date is too long for me. I might tolerate 5 years but I would have preferred something shorter perhaps 3-4 more exciting.

Remember these instruments are traded and in the open market with yields rising the price of these instruments can go below par value to more accurately reflect the market interest rates. If I purchase this on market at $95.00 and hold to redemption $100.00 then I make a capital profit if I hold them for at least 12 months. Just like any other share.

Australia and the RBA are holding interest rates firm and are the last market to do so. Even across the ditch in NZ rates are now 1.0% having had 3 rises while we still sit at 0.1%. Though the election is in May whoever wins will want to raise rates… Well they won’t have a choice, even if they can make it that far without raising rates … because we live in a world market in order to get the money to lend out banks will have to pay more and charge more regardless of the rates set by the RBA.

The issue here is what happens to the price of CBAPK? Yes it’s tied to the Bank Bill Swap Reference Rate but as the base number goes up the impact of the margin drops… Say the margin rate settles on 2.75% and the base rate os 0.1% so the rate you get paid is 2.85%… now rates move to similar as NZ and the base rate is 1.0% now you get paid at 3.75% fantastic but you still only have the margin of 2.75% and now you can enjoy 1.0% everywhere…

Key Question: Does the now 2.75% compensate you enough for the additional risk you get to take in a 1.0% world over the current world where you can only get 0.1%? The impact of the margin lowers every time the base rate rises…

Because we use Navexa we can look within the holding portfolio to see the impact of this change but then combine the portfolios to see the effect across the family group.

Disclosure: We hold CBAPF which means we are offered a rollover to CBAPK, but we will take the cash this time as we feel with rising interest rates we can do better than 2.75-3.00% over the 2022-2029 timeframe. We also carry enough other Hybrids that we are not effecting the overall risk in the portfolio by the change of direction.