Investments and Managed Funds in the Australian and Global Markets

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Page count 9
Word count 2648
Read time 9 min
Subject Economics
Type Essay
Language 🇺🇸 US

Expected (average) return

The expected return is the “estimation of the value of an investment, including the change in price and any payments or dividends calculated from a probability distribution curve of all possible rates of return” (Davidson, 2011). The rate of return for investment depends on the level of risk of that investment. An investment with high risk attracts a high rate of return. This is because the expected return will comprise the risk-free rate of return and risk premium. Risk premium also takes care of the uncertainties in the future. An investor should be compensated for the uncertainties (Davidson, 2011). Appendix 1 below shows the computations of the expected return of the assets and managed funds.

From the computations in appendix 1, it is apparent that the expected return for Australian shares is 10.34%, global shares are 4.93%, the property is 8.16%, fixed interest (bonds) are 7.11, and for cash is 5.54%. Global shares have the least expected return while Australian shares have the highest. On the side of managed funds, the conservative fund has 6.88%, the balance fund has 6.87%, and the diversified fund has 7.13%. The expected returns for these funds are within a range of 0.26%.

Risk (standard deviation)

Investors often use standard deviation used to measure the risk of an investment. This is because standard deviation is a measure of variations from the expectation. Therefore, an investment that deviates more from the expected return is volatile (Davidson, 2011). Appendix 2 shows computations of the risk for the asset classes and managed funds.

From the computations in appendix 2 below, investment in property poses a high risk among the assets at 76.24%. Global shares follow closely at 72.82%. Cash has the lowest risk at 3.23%. Among the managed funds, the diversified fund has the highest risk at 41.33% while the conservative fund has the lowest at 18%.

From the comparisons above, it is evident that investments with high risk attract a high expected rate of return. For instance, among the managed funds, the diversified fund has a high risk of 41.33%. It attracts a high expected rate of return of 16.47% compared to other managed funds. On the other hand, among the asset classes, cash has the lowest risk at 3.23%. It attracts the lowest expected rate of return of 5.54%. Therefore, it is clear that the expected rate of return directly relates to the risk of the investment. High-risk investments attract a high rate of return. This is because an investor has to be compensated with a risk premium.

Managed funds

Managed fund “pools the money of many individual investors. The money is then professionally managed according to the investment objectives of each fund” (Colonial First State Investments Limited 2012). They further argue that “by investing in a managed fund and pooling investors’ money together, people are able to take advantage of investments they cannot access as an individual investor” (Colonial First State Investments Limited 2012a). The management allocates units to an investor after injecting capital. The market value of assets in the fund often fluctuates as a result of changes in the economic conditions. The management of the fund adjusts the value of the investment is so as to reflect the changes in the market value of assets in the fund. According to Colonial First State Limited, “around 1.2 million people in Australia have part or all of their investment in managed funds” (Colonial First State Investments Limited 2012a). Managed funds are popular because they allow investors to access a variety of investments. For instance, an investor can access various classes of assets and various companies in different countries. The funds allow investors to plan for regular investment. Further, experts manage the investors’ funds are there by reducing the risk of loss as a result of poor advice. Finally, the funds allow citizens with low capital outlay to join the fund. For instance, depending on the fund, Colonial First State allows for low investments of about $1,000. The four most common types of managed funds are insurance bonds, superannuation funds, unit trusts, and group investment funds (The New Zealand Investment Research experts, 2012).

Diversification and risk

Due to uncertainties in the economic conditions, returns from investments are uncertain. Some may perform well while others may not. An investor needs to spread his investments in various products so as to spread the risk of uncertainties. Diversification is a scenario where an investor invests in various products. The main aim of diversification is to minimize the risk of losses. Various products do not respond in the same way when there are changes in the economy. Some may increase while others decline (Jones, 2010). As mentioned earlier, investments with high returns have high risks. The high returns allure investors into venture in such products. Therefore, it is prudent to invest in a variety of products so as to minimize the risk of future loss resulting from one investment. However, the degree of diversification depends on the nature of the investor. For instance, a risk-averse investor would not venture into investments with high risk or they may decide to put in little of their investments into such investments. On the other hand, a risk-inclined person would invest more in such ventures so as to get high returns. The risk reduces with an increase in diversification (Taylor, 2009). For instance, from appendix 2, if an investor decides to invest in all the eight products, the expected return for all the products is 7.12% while the average risk is 39.09. This is relatively lower compared to investing in one product with high return and high risk.

Asset class

An asset class comprises a group of assets with similar characteristics. They behave similarly in the marketplace. Finally, the same laws and regulations govern them. The three main asset classes are equities, bonds and cash equivalents (Maginn, Tuttle, McLeavey, & Pinto, 2002). However, in the appendices below, the asset classes are classified into Australian shares, global shares, properties, fixed-interest bonds and cash. These asset classes are discussed below.

Shares

A stock is a unit of ownership in a company. An investor can decide to take ownership of a company by buying shares of that company. The investor will buy shares at the prevailing market price.

Bonds

It is an investment in which an investor gives the money in form of a loan to an entity. The money is given out for a fixed period of time and at a fixed interest rate. Mostly, bonds are used by governments to finance a variety of projects.

Cash equivalent

This asset class comprises investments that are short-term, are highly liquid, and have favorable credit quality. A liquid asset is one that cannot be bought or sold in the market without changes in the market price.

Properties

A property can either be a tangible or intangible asset that has a legal title. Tangible properties include land, buildings and machinery among others. Intangible assets include ideas and patents among others. Properties and land are the real properties.

Multi-sector funds

According to Colonial First State, there are four multi-sector funds. These are conservative fund, balanced fund, diversified fund, and high growth fund. These are discussed below. These funds help in hedging some of its currency exposure.

Conservative fund

The aim of this fund is to “provide a regular income stream while maintaining and potentially increasing the value of capital over the medium term” (Colonial First State Investments Limited 2012b). The fund’s allocation is 30% to be invested in growth assets such as shares and property and 70% in defensive assets such as fixed interest assets and cash. The table below shows the distribution of this fund. The fund should last for a minimum of 3 years.

Asset class Allocation
1 Australian shares 15%
2 Global shares 10%
3 Property securities 5%
4 Fixed interest and cash 70%

Balanced fund

This type of fund “provides a balance of income and capital growth from investments in cash, fixed interest, property and shares over the medium term” (Colonial First State Investments Limited 2012b). The managers allocate 50% of this fund on growth assets and 50% on fixed interest. This distribution is shown in the table below. The fund should last for a minimum of 5 years.

Asset class Allocation
1 Australian shares 20%
2 Global shares 15%
3 Global resource shares 10%
4 Property securities 5%
5 Fixed interest and cash 50%

Diversified funds

The objective of the diversified fund “is to provide medium to long term capital growth together with some income by investing in cash, fixed interest, property and shares” (Colonial First State Investments Limited 2012b). The fund should last for a minimum of 5 years. The managers invest 70% of this fund in growth assets and 30% in defensive assets. The table below summarizes the allocation of this fund into various classes of assets.

Asset class Allocation
1 Australian shares 30%
2 Global shares 20%
3 Global resource shares 10%
4 Property securities 5%
5 Global infrastructure security 5%
6 Fixed interest and cash 30%

High growth fund

The objective of this fund is to “provide long-term capital growth by investing in a diversified portfolio of Australian and global shares” (Colonial First State Investments Limited 2012b). Managers allocate 100% of this fund to growth assets. The fund should last for a minimum of 7 years. The table below shows how the fund is allocated.

Asset class Allocation
1 Australian shares 40%
2 Australian small company shares 10%
3 Global shares 30%
4 Global resources and soft commodity shares 20%
5 Cash 0%

Growth and defensive assets

Growth assets are designated to increase the initial investment. Also, depending on the risk level of the company, they can produce a little income. An investor should consider investing for the long term in the growth of assets. This is because the values of such assets significantly change within a short period. Two examples of growth assets are shares and property. On the other hand, defensive assets protect the investor’s initial investment. These assets provide the potential for growth but are not adequate to give income. Examples of defensive assets are cash and fixed interest (Redhead, 2008).

Risks involved in choosing a managed fund

A key risk that investors face in trying to choose the investments to venture in is the uncertainty of the future performance of the fund. This is mainly attributed to the fluctuation of the economic conditions. Market and liquidity disruptions cause these economic imbalances. This leads to a loss in investors’ confidence. Secondly, there is a risk of insufficient information to inform regulatory action. This results from investing in a number of territories. Investors are not always informed of the impact of different laws on their investments. Third, an investor also faces weaknesses in the valuation of assets. This makes an investor have inadequate information for decision-making. Finally, an investor faces a risk of fraud and mismanagement of the funds (Financial Services Authority, 2005).

Investment decision

Given $50,000, it would be advisable to invest in a conservative fund. This is because it comprises of the five asset classes these are Australian shares, global shares, property securities, fixed interest and cash. This is because my objective is to ensure growth in income and capital. This would help reduce the risks involved. I will also be able to receive a considerable amount of return. With a conservative fund, an investor would receive a return of 6.88% with a risk level of 18% (Lomas, 2012).

Conclusion

It is necessary to carry out a risk assessment so as to establish the viability of such investments. An investor should not only focus on the returns that come with but also on the risks associated with such investments. Managed funds allow investors to access investments that they would otherwise not be able to access as individuals.

Appendices

Appendix 1: Computation of expected return

YEAR TO AUST. SHARES GLOBAL SHARES PROPERTY FIXED INTEREST (BONDS) CASH CONSERVATIVE FUND BALANCED FUND DIVERSIFIED FUND
30TH
JUNE
1997 26.84% 28.46% 28.53% 16.76% 6.77% 16.53% 19.79% 22.97%
1998 0.96% 41.58% 9.97% 10.88% 5.11% 10.40% 15.08% 17.74%
1999 14.14% 8.21% 4.31% 3.28% 5.04% 6.07% 7.18% 8.58%
2000 18.15% 23.69% 11.91% 6.17% 5.58% 9.80% 13.09% 16.09%
2001 9.11% -5.82% 13.91% 7.42% 6.08% 6.21% 4.44% 3.42%
2002 -4.54% -23.26% 14.85% 6.21% 4.66% 1.54% -3.26% -7.13%
2003 -1.61% -18.28% 12.15% 9.78% 4.97% 3.70% -0.60% -4.06%
2004 21.73% 19.38% 17.24% 2.33% 5.30% 8.73% 11.96% 15.31%
2005 26.03% 0.57% 18.10% 7.79% 5.64% 9.57% 9.61% 10.93%
2006 24.02% 19.97% 18.05% 3.41% 5.76% 9.71% 12.99% 16.47%
2007 29.21% 8.23% 25.87% 3.99% 6.42% 10.14% 11.80% 14.50%
2008 -13.67% -21.03% -36.35% 4.42% 7.34% -1.86% -6.87% -11.52%
2009 -20.34% -16.31% -42.27% 10.82% 5.48% -1.09% -6.18% -11.48%
2010 13.10% 5.50% 20.40% 7.90% 3.90% 7.67% 7.97% 8.65%
2011 11.90% 3.00% 5.80% 5.50% 5.00% 6.05% 6.05% 6.49%
Sum 155.03% 73.89% 122.47% 106.66% 83.05% 103.17% 103.05% 106.96%
SUM/15 0.10335333 0.04926 0.081647 0.071107 0.055367 0.06878 0.0687 0.071307
Expected return in % 10.34 4.93 8.16 7.11 5.54 6.88 6.87 7.13

Appendix 2: Computation of risk (standard deviation)

YEAR TO Aust. Shares Standard deviation Global Shares Standard deviation Property Standard deviation Fixed Interest (Bonds) Standard deviation
30THJune
1997 26.84% 272.25 28.46% 553.66 28.53% 414.94 16.76% 93.12
1998 0.96% 87.98 41.58% 1,343.22 9.97% 3.28 10.88% 14.21
1999 14.14% 14.44 8.21% 10.76 4.31% 14.82 3.28% 14.67
2000 18.15% 61.00 23.69% 351.94 11.91% 14.06 6.17% 0.88
2001 9.11% 1.51 -5.82% 115.56 13.91% 33.06 7.42% 0.10
2002 -4.54% 221.41 -23.26% 794.68 14.85% 44.76 6.21% 0.81
2003 -1.61% 142.80 -18.28% 538.70 12.15% 15.92 9.78% 7.13
2004 21.73% 129.73 19.38% 208.80 17.24% 82.45 2.33% 22.85
2005 26.03% 246.18 0.57% 19.01 18.10% 98.80 7.79% 0.46
2006 24.02% 187.14 19.97% 226.20 18.05% 97.81 3.41% 13.69
2007 29.21% 356.08 8.23% 10.89 25.87% 313.64 3.99% 9.73
2008 -13.67% 576.48 -21.03% 673.92 -36.35% 1,981.14 4.42% 7.24
2009 -20.34% 941.26 -16.31% 451.14 -42.27% 2,543.18 10.82% 13.76
2010 13.10% 7.62 5.50% 0.32 20.40% 149.82 7.90% 0.62
2011 11.90% 2.43 3.00% 3.72 5.80% 5.57 5.50% 2.59
Sum 155.03% 3,248.32 73.89% 5,302.53 122.47% 5,813.26 106.66% 201.87
RISK 10.34% 57.00 4.93% 72.82 8.16% 76.24 7.11% 14.21

Continuation of appendix 2

CASH Standard deviation CONSERVATIVE FUND Standard deviation BALANCED FUND Standard deviation DIVERSIFIED FUND Standard deviation
6.77% 1.51 16.53% 93.12 19.79% 166.93 22.97% 250.91
5.11% 0.18 10.40% 12.39 15.08% 67.40 17.74% 112.57
5.04% 0.25 6.07% 0.66 7.18% 0.10 8.58% 2.10
5.58% 0.00 9.80% 8.53 13.09% 38.69 16.09% 80.28
6.08% 0.29 6.21% 0.45 4.44% 5.90 3.42% 13.76
4.66% 0.77 1.54% 28.52 -3.26% 102.62 -7.13% 203.35
4.97% 0.32 3.70% 10.11 -0.60% 55.80 -4.06% 125.22
5.30% 0.06 8.73% 3.42 11.96% 25.91 15.31% 66.91
5.64% 0.01 9.57% 7.24 9.61% 7.51 10.93% 14.44
5.76% 0.05 9.71% 8.01 12.99% 37.45 16.47% 87.24
6.42% 0.77 10.14% 10.63 11.80% 24.30 14.50% 54.32
7.34% 3.24 -1.86% 76.39 -6.87% 188.79 -11.52% 347.82
5.48% 0.00 -1.09% 63.52 -6.18% 170.30 -11.48% 346.33
3.90% 2.69 7.67% 0.62 7.97% 1.21 8.65% 2.31
5.00% 0.29 6.05% 0.69 6.05% 0.67 6.49% 0.41
83.05% 10.46 103.17% 324.29 103.05% 893.59 106.96% 1,707.97
5.54 3.23 6.88 18 6.87 29.89 7.13 41.33

Reference list

Colonial First State Investment Limited 2012a, Product education, Web.

Colonial First State Investments Limited 2012b, Managed investment funds: product disclosure statement, Web.

Davidson, C 2011, Managed funds for dummies, Wiley Publishing Australia Pty Ltd, Australia.

Financial Services Authority, 2005, Hedge funds: a discussion of risk and regulatory engagement, Web.

Jones, C 2010, Investments: analysis and management, John Wiley & Sons Inc., Canada.

Lomas, M 2012, How to invest in managed funds, Wrightbooks, Australia.

Maginn, J, Tuttle, D, McLeavey, D, & Pinto, J. 2002, Managing investment portfolios: a dynamic process, John Wiley & Sons Inc., New Jersey.

Redhead, K 2008, Personal finance and investments: a behavioral finance perspective, Routledge, New York.

Taylor, J 2009, Economics, George Hoffmann, New York.

The New Zealand Investment Research experts 2012, What is a managed fund? 2012. Web.

Cite this paper

Reference

EduRaven. (2022, April 25). Investments and Managed Funds in the Australian and Global Markets. Retrieved from https://eduraven.com/investments-and-managed-funds-in-the-australian-and-global-markets/

Reference

EduRaven. (2022, April 25). Investments and Managed Funds in the Australian and Global Markets. https://eduraven.com/investments-and-managed-funds-in-the-australian-and-global-markets/

Work Cited

"Investments and Managed Funds in the Australian and Global Markets." EduRaven, 25 Apr. 2022, eduraven.com/investments-and-managed-funds-in-the-australian-and-global-markets/.

References

EduRaven. (2022) 'Investments and Managed Funds in the Australian and Global Markets'. 25 April.

References

EduRaven. 2022. "Investments and Managed Funds in the Australian and Global Markets." April 25, 2022. https://eduraven.com/investments-and-managed-funds-in-the-australian-and-global-markets/.

1. EduRaven. "Investments and Managed Funds in the Australian and Global Markets." April 25, 2022. https://eduraven.com/investments-and-managed-funds-in-the-australian-and-global-markets/.


Bibliography


EduRaven. "Investments and Managed Funds in the Australian and Global Markets." April 25, 2022. https://eduraven.com/investments-and-managed-funds-in-the-australian-and-global-markets/.

References

EduRaven. 2022. "Investments and Managed Funds in the Australian and Global Markets." April 25, 2022. https://eduraven.com/investments-and-managed-funds-in-the-australian-and-global-markets/.

1. EduRaven. "Investments and Managed Funds in the Australian and Global Markets." April 25, 2022. https://eduraven.com/investments-and-managed-funds-in-the-australian-and-global-markets/.


Bibliography


EduRaven. "Investments and Managed Funds in the Australian and Global Markets." April 25, 2022. https://eduraven.com/investments-and-managed-funds-in-the-australian-and-global-markets/.