In this article published in The West Australian on 2 May 2016, Malcolm Evans discusses the benefits of direct share market investments as opposed to managed funds.
In a rapidly changing world, consumers have never before been more informed. Investment markets now offer a multitude of different options and quite frankly it is a potential minefield out there.
Direct shares, multi sector managed funds, exchange traded funds, contracts for difference, index funds, actively managed funds, hedge funds and “smart” index funds. Do you have a headache yet?
When determining which investment option is best for you, is flexibility, transparency of pricing and asset ownership, liquidity, cost minimisation and the ability to directly manage your own personal tax consequences important? If so you may want to seriously consider direct share ownership as opposed to a managed fund approach.
Direct share ownership allows you to tailor a portfolio to meet your specific needs. Going direct allows you to make tactical decisions on which sectors or investments you would prefer to own.
Take the recent iron ore price plunge. Australian index funds or index multi sector funds would all hold BHP Billiton and Rio Tinto in their portfolios. Direct share ownership allows you to tactically underweight or to avoid a sector completely.
Direct share ownership provides transparency on where your money is invested. How many times have you checked your latest super fund statement and looked at the pie chart of your multi sector balanced fund and actually understood what you are invested in?
Importantly direct shares give you transparent intra-day pricing which is not available with managed funds, where in some cases redemptions may be monthly or can be frozen at the manager’s discretion as we saw during the Global Financial Crisis.
Because investors within a managed fund are pooled together, new investors often inherit the unrealised capital gains of the underlying assets within the fund. If the fund manager sells units in your fund, the realised capital gains flow through to you via income distributions made during the year. As you have no input into what assets are sold and do not know what the tax position of the fund is, you have no control over the tax outcomes.
Thanks to the rapid development of online broker platforms, brokerage costs for buying and selling direct shares are now as low as $9.95 per trade. For direct investors there is no ongoing management fee once the order has been executed. Compare this to managed funds that may charge a number of fees including ongoing management fees, buy and sell spreads, contribution fees, exit fees and in a lot of cases, performance fees, all of which erode your net returns.
If you strip back the layers of complexity and costs associated with managed funds, direct shares can be a terrific method to creating wealth and providing stable and growing income returns.