In response to an #asknikko question posed on its GoalsGetter platform, Nikko AM NZ’s Head of Distribution, James Wesley, runs over the basics and ultimately builds a case for both.
When you enter the equity market, you're essentially buying a small part of a company. You can do this directly in a targeted fashion, by buying specific shares, or you can do this through a managed fund.
Managed funds are like a pre-packaged portfolio of shares, so in buying units of a fund, you will be purchasing even smaller parts of multiple companies. We’ve grown increasingly familiar with managed funds through the introduction of KiwiSaver. But unlike with your KiwiSaver, you can still access a managed fund at any time.
In an investment world of often confusing lingo, the managed fund is refreshingly self-explanatory. The fund is a pool of many investors’ money, which is managed by a professional fund manager, who is responsible for the investment decisions. Fund managers constantly track the markets and are tapped into worldwide information networks so that they can make informed decisions about what investments to buy and sell and when to do it. In other words, they take care of the hard work.
So irrelevant of market conditions, investing through managed funds might be a smart option for you if you’re just starting out or are not yet confident with making your own investment decisions. And the core reason for this is diversification.
Diversification – or the spread of your investment across multiple industries and asset types – is generally viewed as a key risk management strategy. In fact, the common consensus is that the advantages of share diversification are achieved when a portfolio holds around 20 shares from companies in different industries.
While diversification is inherent in managed fund investment, investing in shares in a single company creates greater exposure to market risk. Therefore in choosing to invest in shares, rather than a managed fund, there are a number of questions you might want to ask yourself:
- Do you have the time, skills and knowledge to properly research companies?
- Do you have enough money to diversify properly?
- Are you knowledgeable about reporting and tax?
If the answer to any of these questions is ‘no’, then a managed fund will likely be the more appropriate option for you.
It’s also worth noting that fund managers are increasingly factoring Environmental, Social and Governance (ESG) considerations into their investment decisions – and because of the size of the investments they manage, they can positively influence organisational strategy in this regard.
Personally I believe that the lockdown is making us more thoughtful about the world we live in, and we will increasingly see a direct correlation between our personal values and our investment choices. Individually as investors we might struggle to influence or support positive change, but collectively our voice, and influence can have a real impact.
In answering the question on behalf of a fund management firm, I’m mindful of showing bias to our own core interest. Of course, both shares and managed funds can be good options - and they are not mutually exclusive. Indeed it’s normal for well-balanced portfolios to include shares and managed funds.
You might choose to invest in a small number of companies that you really like, while also investing in a managed fund to cover your diversification risk. You might think of the managed fund as the core of your portfolio and shares as a satellite – where you pick a particular investment area you’d like more exposure to.
Regardless of whether it’s shares or managed funds, remember to invest for the long term as this helps smooth out the volatility. Timing the market is incredibly difficult. No one accurately predicts how shares perform in the short term, so consider making regular contributions rather than making a one-off investment. And however you choose to structure your investment, I’d recommend getting advice from a professional source like a financial adviser - or a tool like our own GoalsGetter.
Nikko Asset Management New Zealand Limited (Company No. 606057, FSP22562) is the licensed Investment Manager of Nikko AM NZ Investment Scheme, Nikko AM NZ Wholesale Investment Scheme and the Nikko AM KiwiSaver Scheme. This material has been prepared without taking into account a potential investor’s objectives, financial situation or needs and is not intended to constitute personal financial advice, and must not be relied on as such. The Product Disclosure Statements are available on our website: https://www.nikkoam.co.nz/invest/retail