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Do Fund Managers Have The Authority To Change Asset Types?

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Mary Holm
Mary Holm


Do managers of managed funds have the authority/ability to change the asset allocation if the market changes?

For example, a lot of canny investors retreated to mainly cash late last year and avoided most of the losses that others who stayed in the market suffered.

Can the manager of a share fund, for example, do this if he thinks the market is about to bomb, or does he have to stay invested in line with the prospectus?

Also, of course, what do people like me who have made large losses in managed funds do now, sell or stick with it?


Mary Holm: A fund manager does have to stay invested in line with the prospectus. But some prospectuses give more leeway than others - and some managers use that leeway more than others.

I suggest you look at a fund's investment statement - the shorter document aimed at ordinary investors. If it doesn't state clearly what the fund will invest in, and how much flexibility there is, give it a miss.

When looking at share funds, at one extreme are index funds, which invest in the shares in a market index. The holdings vary only slightly from the index, and are adjusted regularly to keep up with index changes. The managers hold a bit of cash - money that's not yet invested and so on - but not much.

Then we have actively managed funds whose managers buy and sell shares in the hopes of beating the market. Some active managers say their holdings will be largely shares, regardless of market changes. But others say they will move in and out of the market, sometimes holding largely cash if they think share prices are heading downwards.

In the past couple of years, managers in that last group who bailed out of shares before the downturn have, of course, topped the share fund performance lists - ironically because they didn't hold many shares.

It's important to realise, though, that no manager who tries to time market booms and busts will always get it right. When they succeed, they can make a lot of noise about it. When they don't, all's quiet on the manager front.

The next test for the in-again out-again funds will be judging when to get back more fully into shares. The market can rise quite suddenly, and some managers will be left on the sidelines - with far lower returns than funds that have stuck with shares throughout the downturn.

Every would-be share fund investor has to decide which style of management they want.

Personally, I go for index funds. They don't claim to beat the market. But recent research in the United States and Australia confirms earlier findings - that more often than not they end up doing better than active funds over the long term. Their superior performance is especially true after fees, which are lower for index funds because they are easier to manage and trade less.

You are apparently in either an index fund or an active fund that stays largely invested in shares. If you would prefer an active fund that moves in and out of the market - in the hope that the managers will be unusually good market timers - by all means move to such a fund at some stage. But not yet.

While shares have risen considerably in recent months, if you move now you'll still be turning paper losses into real losses - assuming you invested before the financial crisis. Better to wait until the sharemarket rises further and the in-again out-again managers hold mostly shares.

At that point, the assets held by all the share funds will be more alike, and you can move from one fund to another without loss.


Mary Holm is the author of bestselling books on KiwiSaver and personal finance. She is also a highly praised seminar presenter. Her written advice is of a general nature, and she is not responsible for any loss that any reader may suffer from following that advice.    

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