The Great Debate! Managed Funds vs ETFs vs LICs...what they are, how they work and what's best to invest in

The debate!

(it's not time for a math debate, there will be numbers)

Please do listen to our episode "Pay yourself" first

The choices are: Managed Funds, ETFs, LICs

• What they are and what they do
• Features and what works best
• Who will win?

Disclaimer – Full disclosure, I own all three types. Bought shares first, Managed funds about 6 years ago (tech super longer), ETFs and LICs in past 3 years.

Introducing the contenders:

1. Managed Fund – more managed funds than shares on ASX. 31 December 2017, the managed funds industry had $3,389.6b funds under management (FUM), not FUN, FUM, fun for managers for fees. But some are worth it.
   1. Structure - Unit trust
   2. Price– Net tangible assets. All shares in UT are worth $1,000,000. units 1,000,000 = $1 Units
   3. Underlying investment

2. ETF
   1. Structured as managed funds, but on the ASX – Unit trusts – Income and FC flow through based on holdings. Dividend may not be FF
   2. Price – Supply demand, but - Net tangible assets. All shares are worth $1,000,000. Shares 1,000,000 = $1NTA
   3. Underlying investment

3. LIC
   • Structured as company – Income determined by board, FC usually paid (due to tax)
   • Price – Net tangible assets. All shares are worth $1,000,000. Shares 1,000,000 = $1NTA
   • Underlying investment – Mostly shares – Different segments – small cap, styles

Company V Trust – one has discretion, one is a flow through – value is the same, vs other company

What are they? - Features

1. How are they traded and when?
   • End of day - MFs
   • Intermarket - LICs, ETFs
2. Diversification
   • Index - Lots of shares, top heavy
   • Active - 30-150 shares, select sectors/styles
   • Asset classes - Managed funds allow greater access to alt. investments

3. Costs
   • MERs – percentage-based cost 1% of $100 = $1
     • passive MFs same as ETFs 0.18%, Active 0.8-1.4% p.a. – LICs/MFs
   • Platform costs – Admin fees %, plus flat, sometimes built into platforms (AMP)
   • Transaction costs – per $1,000, each year
     • Buy sell – 0.2% = $2, 1 year = $24
     • Brokerage – $20 = 2%, 1 year = $240

Investment styles

3. 1. Active
   2. Passive
   3. Target investments
4. 1. Performance/Volatility

Winners:

• Managed funds – transaction costs, investment styles, diversification
• ETFs – MERs, off platform, index diversification
• LIC – Investment style

Losers

• Managed funds – MERs, platform costs,
• ETFs – brokerage
• LIC – brokerage

In the end:

1. How much will you invest?
2. For how long?
3. What is the end goal?
4. How risky are you? – Costs and volatility – reduce your performance
5. How active do you want to be or hands off?

Summary

I like all three – this is what I do...

1. Managed funds – use for smaller monthly investment – as $100 minimums per fund.
2. LICs – invest into when dividends come in
3. ETFs – same as LICs - invest when dividends come in.