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GENC3003Personal Financial Planning Andrew Hingstonandrew.hingston@unsw.edu.au Unit 14: Managed funds
2 A managed fund illustration 100 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 One 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 The 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 $100,000 The 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 million Each unit is worth $130 million / 100 million = $1.30
5 However, people need some cash to pay for living expenses. They have two options: Sell some units in exchange for cash Request 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 payments The cash distribution is $4 million / 100 million unit = 4cents per unit. Each investor gets 1 million x 4c = $40,000 The value of the trust’s assets is now only $126 million so the unit price goes down after the distribution to $1.26 Year 2 starts …

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Unit 14a Managed Funds

  • 1. GENC3003Personal Financial Planning Andrew Hingstonandrew.hingston@unsw.edu.au Unit 14: Managed funds
  • 2. 2 A managed fund illustration 100 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. 3 One 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. 4 The 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 $100,000 The 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 million Each unit is worth $130 million / 100 million = $1.30
  • 5. 5 However, people need some cash to pay for living expenses. They have two options: Sell some units in exchange for cash Request 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 payments The cash distribution is $4 million / 100 million unit = 4cents per unit. Each investor gets 1 million x 4c = $40,000 The value of the trust’s assets is now only $126 million so the unit price goes down after the distribution to $1.26 Year 2 starts …