Managed Investments

Managed Funds

A managed fund pools your money with money from other investors to form an investment fund. Specialist investment managers then invest the money in the fund on your behalf.

Managed funds come in many shapes and sizes. Some funds invest in just one type of investment such as Australian shares, international shares, cash or mortgages while others known as diversified funds invest across a range of asset classes including Australian shares, international shares, fixed interest, property securities and cash.

So whether you have $2,000, $20,000 or $200,000 to invest, your money has access to the investment buying power of millions of dollars. This buying power means you can take advantage of opportunities normally only available to large corporations or those with extensive specialist knowledge.

Multi-Manager Investing

Multi-manager investing is a simple concept that aims to deliver returns and manage risk. Unlike a traditional fund, in which a single fund manager controls all of the money and investments in a fund, Multi-Manager portfolios spread your money across different asset types and funds managers. By not putting all your eggs in one basket, we help you diversify your investments and reduce your exposure to risk.

Separately Managed Accounts

A Separately Managed Account (SMA) is a customised share portfolio where the shares are owned by individual investors. Your investment in a SMA is allocated across one or more existing investment models. These investment models have been provided by investment specialists and vary in focus in much the same way that managed funds vary in their risk and return objectives.

SMA’s are an evolution from the Managed Fund style of investments. Your investment is professionally managed like an individual portfolio with many key advantages:

• The securities in your account are visible and portable just as they would be if you had purchased securities directly;

• You own the underlying shares not units in a fund

• You are able to manage your tax position and not be saddled with accrued capital gains that are often part of the unit price in managed funds.

Investors in SMA’s each have a unique portfolio that is apportioned across a number of model portfolios within the SMA. Investors retain beneficial ownership of the underlying stocks in their portfolio – and are therefore eligible for dividends and franking credits.

An investor’s beneficial ownership of their own discreet portfolio also gives them visibility of the underlying stocks and a range of associated tax advantages.

Visibility: The investor can log on to an online service with a user name and password and view their underlying stocks as a single portfolio – even where stock is invested over more than one model portfolio within the SMA.

Fees and Charges: While SMA platforms may vary slightly, investors can generally expect to be able to take advantage of cost savings through wholesale brokerage rates and the netting of transactions across the whole SMA.

Tax Advantages: SMA’s can also suggest optimised tax parcels that have resulted from trading throughout the year. The investor’s accountant has access to detailed, real-time reporting – thus optimising the taxation process.

What benefits are passed on to individual investors?

There are many benefits to investing in an SMA, often related to transparency, volume benefits and beneficial ownership.

Transparency

In an SMA, there are two aspects to transparency:

• The visibility of the underlying securities.
• Transparency of fees.

Investors retain beneficial ownership of the stock in their SMA account and are able to see their investments displayed as a single portfolio, on line.

When it comes to fees, investors (and their advisers) are able to see what fees are being charged – including transaction fees, in-specie transfer fees and corporate action processing fees.

Beneficial ownership

Beneficial ownership of stock is a key feature of SMAs, providing investors with significant tax advantages as well as visibility of the stock they own.

Volume benefits, netting and the use of wholesale brokerage services, where available, provide opportunities for cost savings to be passed on to individual investors.

What are the potential tax benefits of using an SMA?

SMAs provide transaction options that can minimise the CGT impact.

With traditional unitised funds, new investors generally inherit the existing tax position when they enter the trust. This is not the case with SMAs.

Most SMAs have a strong focus on recording and managing CGT consequences. Three major tax advantages of SMAs are:

• No embedded CGT, which minimises tax events.
• Minimised CGT trigger events improve overall performance.
• When realising CGT, investors can choose the most favourable tax parcel(s) – from within the SMA or outside it.

Investment Bonds

Understanding Investment Bonds

Bonds are a form of managed fund operated by life insurance companies and friendly societies. An insurance or investment bond (referred to as a bond) is essentially a life insurance policy and provides a simple and flexible way to save for a future goal. A bond may involve a once-only premium payment (or investment); alternatively, investors may take advantage of the 125% rule (see below) and make regular “top-ups” once the initial premium has been paid.

By investing in a bond, investors pool monies and the funds are managed by investment professionals. In this sense, they operate similarly to managed funds; the main difference being the tax treatment of investment earnings. Bonds also offer the ability to switch between different investment options.

Depending upon the product, monies may be invested in a range of investment options such as cash, fixed interest, property, Australian shares and international shares. This provides the opportunity for diversification within a single investment structure.

The investment returns on a bond are taxed in the hands of the insurance company and the earnings are reported net of this tax.

The tax on investment earnings is 30%. This can be reduced by dividend imputation credits and other offsets where the underlying investment has an exposure to Australian shares and property.

As the life insurance company pays the tax on investment earnings, there is no need for an investor to make any annual tax declarations or keep capital gains records from year to year.

The 10-year rule

If the bond is held for 10 years or more, no additional tax is payable on investment earnings. If the bond is withdrawn before the expiry of the 10-year period, the profit (proceeds less total amounts invested) will be included in the investor’s assessable income and be taxed at their marginal tax rate. However, any profit that is assessable receives a tax offset of 30%.

The tax treatment of investment earnings from the bond depends upon the timing of the withdrawal as follows:

Up to the 8th year all earnings are assessable

During the 9th year 2/3rd earnings are assessable

During the 10th year 1/3rd earnings are assessable

After 10th year all earnings are not assessable (tax paid)

The 125% rule

Each policy year, an investor can make contributions of up to 125% of the previous year’s investment. The benefit of this is that the additional contributions do not have to be invested for the full 10 years to acquire the tax paid status. The example below illustrates the opportunity available.

(Based on additional investments of 125% of the previous policy year’s investment).

The 125% opportunity can be used past the 10-year mark. As the rule refers to 125% of the previous year’s investment, if no investment is made in any year, an investment cannot be made in the subsequent year without re-starting the 10-year tax free period on the whole balance.

Other tax considerations

Any death benefit paid will be tax free in the hands of the recipient.

Changing investment options within a bond does not usually change the tax status of the bond and therefore generally has no tax consequence for the investor.

Bonds are tax paid investments and therefore do not generate any assessable income for an investor (unless redeemed before 10 years). They are not suitable investments for gearing purposes (i.e. borrowing to invest). As bond earnings are taxed at a maximum of 30%, a bond can be an attractive investment for those on higher marginal tax rates.

If an investor withdraws a bond within the first 10 years, and their marginal tax rate is below 30%, any excess tax offset, can be used to reduce tax payable on other income.

Risks

Taxation and legislative risk

Our information is based on legislative practices of the Australian Taxation Office and other relevant government bodies as they presently exist. As with most financial related matters there is always legislative risk that provisions may be amended.

Investment risk

The value of an Investment Bond may fluctuate over time as a result of changes in the value of the underlying investments held.

Investors should be aware that the original capital is not guaranteed (unless the investment option selected offers a capital guarantee) and the value of the investment will rise and fall with prevailing market conditions. Investment values and returns are dependent upon the circumstances of individual investments included in the diversified portfolio, changes in interest rates and exchange rates, and the economic and investment cycles of different countries.

Summary

By investing in a bond, an investor has the potential benefit (depending upon the choices within the particular product) of being able to diversify their investment across all asset sectors and the ability to switch between investment options.

A bond investment provides the investor with tax simplicity as the investor does not have to make any annual tax declarations or keep capital gains records from year to year unless a withdrawal is made within ten years.

Bonds may also provide tax benefits to investors on marginal tax rates in excess of 30% as there is no capital gains tax or income tax payable on withdrawals after year 10.

ETF’s (Exchange Traded Funds)

Spread your investments through diversification.

Low-cost, efficient diversification

Exchange Traded Funds (ETFs) are funds that trade on a stock exchange, just like ordinary shares. They combine the investment advantages of a managed fund with the ease and cost-effectiveness of share trading.

You can use ETFs for cost-effective, easy access to markets and asset classes you might not otherwise have access to, such as debt, derivatives, currency and commodities.

One simple ETF transaction can help you to diversify your portfolio, as each unit of an ETF represents a basket of securities that often replicates the performance of a specific index or benchmark.

How it works

ETFs trade at a unit price close to the net asset value of the underlying portfolio and each ETF has an ASX code, just like ordinary shares. As ETFs have an open ended structure, you can enter and exit an ETF as you choose (subject to liquidity).

• ETFs are a basket of securities created by issuers or fund managers.
• Each ETF generally looks to replicate the returns of a specific index/benchmark.
• Each ETF is allocated an ASX code and lists on the Australian Securities Exchange as one entity.
• You trade and settle ETFs like ordinary shares, with a minimum investment of $500.

Simplicity and flexibility

You can buy and sell ETFs using a CommSec Share Trading Account. ETFs have an ASX code, which you use to trade and track their value. Trades settle like ordinary shares.

Diversification

ETFs are a simple, affordable way to diversify. As a single ETF unit represents a basket of securities, just one transaction can spread your investment over multiple underlying companies.

Expanded market and asset access

With ETFs, you can gain access to markets and asset classes that may not otherwise be available on the Australian Securities Exchange (ASX).

Cost-efficiency

Brokerage for an ETF trade is the same as for an ordinary Australian share trade, with the same minimum investment of $500. ETF management costs are generally lower than managed funds.

Transparency

As ETFs are traded on the Australian Stock Exchange there is clear price visibility. ETF managers also regularly disclose to the market what securities are included in each ETF.

Liquidity

ETFs can be bought and sold on market like an ordinary share. It is easy to exit an ETF if you no longer wish to hold the ETF investment.