The document summarizes how a managed fund works using an example of 100 friends pooling $1 million each, totaling $100 million, to invest through a fund manager. The fund manager invests the money and charges fees to manage the portfolio. In the first year, the value of the investments grows to $130 million. Unit holders have the option to sell units for cash or receive cash distributions from the fund manager based on dividend income. The fund manager distributes $4 million in dividends, lowering the unit price to $1.26.

1. GENC3003Personal Financial PlanningAndrew Hingstonandrew.hingston@unsw.edu.auUnit 14: Managed funds

2. 2A managed fund illustration100 friends from a Rotary club decide they are all sick of investing their retirement savings themselves.They all have $1,000,000 each.They decide to pool together all their money into a special trust account ($100 million).The trust is divided into 100 million units each worth $1 each. Each initial investor therefore gets 1 million units which entitles them to 1/100 of all the returns and assets of the trust.

3. 3One of them is an ex-merchant banker and he agrees to manage the entire portfolio for everyone at a cost of $50,000 per year (0.05%). He expects to incur costs of another $50,000 per year in transaction, legal and accounting expenses (0.05%). He is called the “fund manager”.The fund manager researches the Australian sharemarket and chooses 20 quality companies to invest all the money in (not equally). He invests $98 million in these shares and keeps $2 million in cash investments in case anyone wants to withdraw money and to pay for expenses.

4. 4The first year is a great one. Most of the shares went up in price (although some went down).The value of the $98 million in shares has now gone up to $126 million.The shares have also paid dividends of $4 million.The $2 million in cash earned interest of $100,000The fund manager pays himself $50,000 and the bills of $50,000 from the cash assets of the fund.All up, the total assets of the trust are now $130 millionEach unit is worth $130 million / 100 million = $1.30

5. 5However, people need some cash to pay for living expenses. They have two options:Sell some units in exchange for cashRequest fund manager to pay out some of the cash as a “distribution” to all unit holders.The fund manager decides to pay all cash received as dividends ($4 million) to unit holders as cash paymentsThe cash distribution is $4 million / 100 million unit = 4cents per unit. Each investor gets 1 million x 4c = $40,000The value of the trust’s assets is now only $126 million so the unit price goes down after the distribution to $1.26Year 2 starts …