Understanding Managed Funds & how they have reacted to COVID-19


Introduction

No one enjoys seeing their hard-earned savings/investments go down in value. You will no doubt agree that we are going through unprecedented times in economic history due to the coronavirus epidemic which has rocked markets worldwide.


Governments around the world have announced a variety of social distancing measures, ranging from the banning of mass gatherings and restrictions on inbound travel to a complete lockdown of the country in line with Wuhan in China.


The experience in Wuhan shows that drastic social distancing measures are effective in containing the spread of the virus, but it may be at least a week or two before we see any moderation in cases numbers.


During these tough times, it is valuable to understand a few investment concepts. In this article, we cover the important things you need to know about Managed Funds.


What is a Managed Fund?

A managed fund is an investment fund that is managed professionally by an expert fund manager (e.g. Booster, ANZ, AMP, etc.) who invests in a variety of investments such as shares, property, bonds and cash. The actual type and mix of investments within the fund depends on a predetermined mandate communicated by the fund manager as to how aggressive or conservative the overall fund will be.


With managed funds, your money is pooled together with that of other investors to create a single fund that provides significant investor benefits, which include an instant increase in buying strength (economies of scale).


Main advantages of Managed Funds include:

  • Diversification of risk

  • Professional management

  • Access to local & global markets and a wide range of investment opportunities including access to investment opportunities that would otherwise not be available to the individual investors

  • Relatively quick and convenient access to your investment if your circumstances change (with exceptions of KiwiSaver funds, super funds, etc. which have locked-in provisions)

  • Tax efficiencies


How is the Fund Value of a managed fund determined?

The Fund Value = Number of Units X’s Unit Price


Why is your Managed Fund value fluctuating?

A managed fund is not like a savings account or a term deposit where you store your money. It is an investment, where the money you put in buys “units” of investments such as shares, bonds, cash, commercial/industrial property, etc.


The value of these units goes up and down regularly and can vary depending on a number of factors including share market performance, central bank’s monetary policy (e.g. changing interest rates) and/or bond market price movements. There can be disruptive periods causing global economic downturns like the 2007-2008 Global Financial Crisis (commonly known as “The GFC”) or more recently a significant drop in share markets values from February 2020 to today whilst the countries of the world adapt and unite to fight COVID-19. It’s during unsettling times such as these that we typically see more wobbles (fluctuations) and deeper downturns before the market can settle and eventually look to recover. In a nutshell, any changes in your unit prices values and/or number of units you hold, will change your fund value.


Why is the fund value falling now?

When you own managed funds, you own a part of an asset such as a share, property, bond, etc. (i.e. you are part owner). When something like coronavirus happens, businesses and the profits they make are typically affected, making them less valuable (people will pay less for those assets you own).


That’s essentially due to the rough road that's been happening in the share market and bond market. The coronavirus outbreak is affecting many economies by reducing the production of goods, demand from consumers, imports and exports, and travel, among other things. So, the businesses you own are facing headwinds, and the shares in those businesses fall in value as a result. E.g. Tourism, Airports, Airlines.


Will the market keep falling?

No one can tell the future (although many try). What we do know is that the market is very volatile now – a day of falling may be followed by a day of recovery. This reflects the uncertainty surrounding coronavirus and what will happen. Each time something new happens, the market adjusts its outlook and share prices rise or fall accordingly.

Finally, history shows that markets eventually recover and slope upwards. However, the ride is bumpy and therefore it's important that we wear our seatbelts and stay tight until we weather this storm.

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