Managed Funds

 

Before we recommend any funds we go through a two-step internal review process

  1. First we aim to understand our clients – what they think their ability is to handle risk and, more importantly, their capacity to absorb that risk should that investment go belly up.
  2. We then overlay that information against research to get to the core of the product. We use personal research, including meeting with the managed funds, to understand the companies they invest in, what they are looking for and why.

How do you choose the right fund?

There are hundreds of funds available and most people just look at the past returns that are published in the newspaper. Historical returns do not guarantee the same returns in the future: there are just too many variables. We focus on using high quality impartial research provided by external research houses, considering the:

  • People
  • Processes
  • Investment philosophy
  • And the risk these managers take when investing your money.

When we recommend a managed fund we use research by Van Eyke. This looks at the people within the companies and their expertise, how they operate as a team, as well as the processes the companies adopt – are these logical and robust for growth? They look for The Risk Adjusted Rate. This involves assessing what risk managers take with your money to get that return.

Here’s an example:

Looking at the cash flow statements before you invest

John insisted on jumping on the tech stock bandwagon when people were saying the old economy was finished. John asked for our advice in investing in managed funds specialising in technology stocks. When we looked into the sector, most of these companies used terms such as ‘blue sky’, hinting at unlimited profits, but when we looked at their cash flow statements their only claim to fame was that they were burning cash at a slower rate than their competitors and hadn’t delivered even $1 in sales revenue and profit.

We spoke to someone recently who made a fortune in the tech boom by setting up a company with lots of staff and a cobbled together business plan and sold it to venture capitalists for $7 million. Within two years, the venture capitalists had to write their investment down to zero. As he said, ‘it was all about the appearance of a functioning business’.

Research is the key to any investing.

Looking beyond the prospectus

We were once approached by a large agricultural investment scheme at a seminar. When we asked if a client invested $100,000 into the scheme how much of that money would actually go into the project, their response was that they weren’t at liberty to disclose that information. Our response was that if you can’t be transparent, how can we honestly look at recommending this as a good investment.

We were approached by a large agribusiness managed investment scheme which claimed to have successfully completed projects and were offering large commissions to recommend their scheme to our clients. We asked them to take us through the experience of an investor in one of their completed projects, looking for answers to the amount they had invested, the tax benefits and the final outcome of their overall returns. Interestingly, they blatantly refused to answer any of our questions. Our philosophy is if you can’t take us through the success story, we can’t trust you.

Our guarantee is that we will always asses an investment on its merits.

We will not and don’t take any commissions from investment products. If a product does pay commissions, we either set the rate to $0 or, if that isn’t possible, we pay the commission to you!

We never want you to feel that our advice is tainted by payment of a commission.

Direct Equities (Shares)

Wealth management isn’t just about fund managers, we also use direct equities. We work with specific stockbrokers and access their research for clients who want to actively participate in the selection of their investments. The portfolio may or may not beat the fund managers, but it allows you as the investor to directly influence the outcomes and you have total control over what companies you invest in.

If you are looking at investing in direct shares, you need to be comfortable and prepared to read their annual reports to gain a deeper understanding of what the company is doing and why. You need to consider:

  • Does their strategy make sense?
  • Are the products and services they sell something you think the market is going to need in 5 years?
  • Do they have good management that focuses on long term rather than short term profits?
  • Are they focused on organic growth or acquisition?

What most people overlook is that as a shareholder you become a business owner (albeit a very small one – but a business owner none the less). You are investing in that company because you believe that the management team is going to increase profits and is a growing company.

When investing in cash you’re really talking about typical bank accounts, online transaction accounts and term deposits. Our role is to help you understand your cash flow requirements so you strike a balance between flexibility and higher interest rates.

We help you balance your cash holdings between flexibility or access. We balance a slightly lower interest rate against the higher rate of a term deposit. While the latter typically has a higher rate of interest, you have to lock up your money for longer timeframes. If you get the mix wrong, you could find yourself having to break a term deposit and accept the interest penalty imposed by the bank.

Many banks attract new investors with a ‘ blackboard interest rate’, which is higher than that for existing investors. The issue is that when the term deposit matures, the interest rate generally drops significantly – anywhere from ½% – 1.5%. If you have $500,000 invested, this could cost you up to $7,500 per year.

Our role is to make the process of accessing competitive interest rates significantly easier. Our “MFG Cash Enhancement System” minimises the paperwork of moving banks so you can take advantage of better rates elsewhere, ensuring the $7,500 stays in your pocket.

Many people incorrectly believe that fixed interest products are like term deposits – they aren’t! Fixed Interest Securities are as susceptible to market fluctuations as any other investment. Fixed interest products typically are debt issued by government or big business to raise capital. What people often think when they read the words ‘fixed’ and ‘securities’ is that these translate to the value they will get and that there is no risk to their capital. Nothing could be further from the truth. Fixed interest securities are susceptible to three main influences:

  • Movement in overall interest rates
  • The perceived strength of the government raising the money
  • The perceived stability of the company issuing the debt

During the recent GFC, a large number of fixed interest securities suffered the same decrease in capital value as share prices simply because people were concerned about the long term viability of the business issuing the debt.

As fixed interest security holders rank below all other creditors except shareholders, you are second last in line to receive any money recoverable from a collapsed company. Some fixed interest converts to the company’s ordinary shares upon maturity, but you may want your money back, not company shares. Read the fine print, and make sure you understand all the details. 

 

Property

While investing in property is, for many people, a relevant investment strategy, it’s not the silver bullet for wealth creation. As with all investments, property carries risks which need to be understood and assessed.

Australians typically feel very comfortable with the concept of buying property, either as a home or investment. If you are going to use property as a pillar of your investments, the following 5 key factors need to be considered:

ROE – Return on your Equity
Be Impartial and Clinical
Use an expert
Structuring the ownership correctly
To ensure you get your desired return on investment from your property, our role is twofold: