6 adviser-approved managed funds for your portfolio

Trying to find the right managed fund can be tough, tiresome, if ultimately rewarding, work. 

After all, this land of only 25.4 million people boasts 897 Australian equity funds (large, mid, small-cap, and AREIT), 475 international equity funds, and 112 Australian bond funds according to S&P Dow Jones Indices. 

That's A LOT of funds, particularly given the majority underperform the benchmark. 

In fact, SPIVA data has found that 81.7% of large-cap Australian equities funds underperformed the S&P/ASX 200 over a five-year basis. Not great, really, by anyone's book. 

To help you to better assess the menagerie of managed funds available to the Aussie market, Medallion Financial Group's Michael Wayne shares the factors he and his team use to distinguish winning managers and investment products. Plus, he shares six funds that have received the Medallion tick of approval. 

Note: This video was filmed on 22 April 2021. You can watch the video or read an edited transcript below.

Edited Transcript

How should investors use managed funds and equities in their portfolios? 

From our perspective at Medallion, it's always a mix of both managed funds and direct equities. Our area of specialty is the Australian stock market. So often we'll use funds when it's outside our area of competence. For us, international shares aren't our area of expertise. So we'll often go to international fund managers or even exchange-traded funds for more of a passive approach.

Often as well, for diversification, it makes sense to use managed funds. We obviously back our own approach and we back our own strategy, but we don't have hubris. We understand that there are going to be other approaches to investing in the markets. And there are going to be times when one strategy might do better than another strategy. So in order to get that diversification to different approaches and to different markets and geographical regions, managed funds can play a very important role, as can ETFs. And also things like the hybrid ETF as well, or some of the fixed income ETFs that are out there, or managed funds that are out there are a good way for clients to access parts of the market where they wouldn't get access usually.

So for example, there is one called Regal, which has an alternate long/short investment fund and is listed on the ASX as a LIC. Typically the average household retail investor wouldn't get access to those sorts of things. So by investing in it through the market, it gives you exposure to parts of the market you wouldn't normally get on your own. So, that's typically how we look at balancing managed funds with direct equities.

How do you assess a fund manager?

For instance, small-cap Australian fund managers actually outperform the benchmark on around 60% of occasions, which is a very good stat. International fund managers based in Australia tend to underperform the index on about 65-70% of occasions. So you can see there that the best international fund managers are few and far between, but likewise in the small-cap space, you can find a lot of good Australian fund managers that are able to get outsized returns. So you've got to look at the little nuances like that. But other things like fees are important, you don't want fund managers charging too higher fees and too big management fees. Always look at performance after fees are taken out, so net of fees.

You've also got to look at whether a fund is adhering to its mandate. Often you'll have a fund that claims to be active, charging active management fees, but when you look at their underlying portfolio, the portfolio is just mirroring the market with maybe a small tracking error, 10-20% of some more active positions. So make sure you understand what that fund is investing in, understand the structure of the portfolio. For us as well you've got to understand what that managed fund is trying to achieve. Sometimes they're looking to reduce risk, so they'll sacrifice a bit of upside in order to collect less downside capture and they'll sort of capture more upside sometimes as well. So downside and upside capture, are definitely two things to look at. But there are a number of different items. For example, you can look at things like the Sharpe ratio, which takes into account volatility and the risk of each fund relative to the market. So, we're always looking at different ways of looking at managed funds, and then they're just some of the many measures you can look at.

What are some examples of funds that have passed your filters? 

There are a lot of different funds out there, and a lot of them are attractive for different reasons. So for instance, there's one that's particularly attractive to us for a number of reasons, it's been a very good performer in international space, and that's the Hearts and Minds Investments (ASX: HM1) listed investment company. It's performed very, very well in recent years. And essentially it donates a big chunk of its performance fee and its management fee, if not all of it to a certain charity. So that part is attractive. It also gives you good exposure to a number of good quality fund managers in the international space.

Often we look at listed investment companies that give you exposure to say the domestic small caps market, and one particular one is the Ophir High Conviction Fund (ASX: OPH) because as I was maybe touching upon before, you can't have hubris when investing in the market. You can't think that you know everything, often it's good to diversify away from your approach and your strategy. And Ophir is one that's done a very good job over a number of years, and we like their investment approach.

There are others such as the Australian Hybrid Fund (ASX: HBRD) which is actually managed by Coolabah Capital and Chris Joye and the guys over there. That's been particularly good in recent years in managing a portfolio of hybrid securities. Hybrids can be very, very complex. They can be hard to understand. By investing in this particular one, you get access to mainly bank hybrids and you get decent performance relative to the index. You also get relatively good downside capture. The downside of this particular fund has proven to be pretty good, particularly during the COVID-19 period.

Some others as well that we sort of look at, there's some in the fixed income space that we invest in. There are others that give you exposure to emerging thematics and sectors out there. ASX: ACDC is an interesting one, which gives clients exposure to the emerging lithium, battery and electric vehicles thematic that's out there. Often in infant industries, it's very hard to pick the winners. All you have to do is think about the internet, right? 20 years ago, we had no idea who was going to be the eventual winners, despite having an inkling that the internet was here to stay. So it's the same sort of thing when it comes to electric vehicles and battery technology. Sure, there's no doubt that that's going to be more prevalent in our lives, or very likely it's going to be more prevalent in our lives, but it's difficult to pick the exact names that are going to win from that. So an ETF such as ACDC can be a very attractive proposition. And as I touched upon earlier, the Regal Investment Fund (ASX: RF1) is a good way to get exposure to alternate investments.

And then finally there's an ETMF, so an Exchange-Traded Managed Fund called WCM Quality Global Growth (ASX: WCMQ), which is a US-based international fund manager, which has had a particularly good track record. Often LICs will trade at a big discount to NTAs, so their Net Tangible Assets, whereas ETMFs tend to have a closer tracking to the net asset value or the NAV. So that's a particularly attractive one that we like that gives you good exposure to the US shares.

Do you prefer ETFs or LICs? 

I'll leave you with one final little nuance that we look at when looking at different fund managers. In more recent times, we've seen the advent of a few more ETMFs, so more actively managed ETFs. And we tend to prefer those over some listed investment companies, just as a general rule. Because I think a lot of people have noticed in recent years, the LICs have been trading at very large discounts to NTA. Or in some cases, very large premiums. We find that the ETMFs, so the actively managed ETFs, tend to track their NAV a lot more closely than the LICs. I think a lot of it is just sentiment. So everyone is probably familiar with Wilson Asset Management and WAM and WAX. They trade on very large premiums to NTA, and often because they've got the runs on the board, they've got a very good track record. They might have built up a lot of retained earnings, which means over time they can smooth out their dividend payments.

You also have to understand that each client's preference might differ slightly. A listed investment company is just that, it's a company. It pays out franked dividends. Whereas an ETMF, an actively managed ETF, is a trust structure. So they don't get the franking credits, but they might more closely track that NAV. So you do have to take those things into account, or clients definitely have to take those things into account, but the market definitely does ebb and flow with sentiment. The exact drivers of what causes a discount or a premium are often debated. But I think a lot of it comes down to size. A lot of it comes down to the size of the secondary market, the liquidity and the volume. And often it comes down to a long period of track record.

But to your point, HM1 has had a very good run recently and trades at a premium to NTA. Whereas the Future Generation Fund, which is a similar sort of concept, trades at a bit of a discount. Look for us, time to time, the discount or the premium doesn't really matter. It's the size of that premium, which can often be a deterrent. And often the size of the discount can be an attractive feature when looking to pick up a bargain. Particularly if that company is conducting a buyback or something along those lines.

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Medallion Financial is a specialist wealth advisory firm, with expertise across a range of domestic and international markets.