Ask a fund manager anything: a Q&A with AMP Capital

Greg Fleming Jan 2017 1.jpg

Last month, we put the call out for you to ask AMP Capital anything! AMP Capital manage over $200 billion in funds globally (including $21 billion for Kiwi investors!). This includes AMP Capital Global Shares—a passively-managed fund on Sharesies that invests in over 2000 companies around the world.

We sent your questions off to Greg Fleming, Head of Investment Strategy at AMP Capital, to get some answers!

What's a passively-managed fund, and what are the advantages of that over an actively managed one?—Emily

Before we can describe the difference between active and passive funds, we need to know a little bit about what a market index is.

A market index tracks a sector, or slice, of the overall share market. For example, the Dow Jones Industrial Average is an index that tracks 30 major US shares. The index is re-evaluated regularly based on a set of rules. A company sitting at #30 might drop out of the index, allowing a new company that is better performing to step up into the #30 spot.

Actively managed funds are when the fund manager tries to ‘beat the market’. They do this by actively making decisions about what to buy and sell within the fund (rather than simply relying on the ‘rules’ of the index)—according to their judgement of the risks and opportunities—to achieve the best result for their investors.

Passive funds are funds on auto-pilot. Rather than picking and choosing what’s in the fund, the fund manager tries to match the make-up or performance of a market index. They’re simply ‘buying the market’ and following the established rules of the fund. For this reason, the management fees are usually cheaper for passive funds than active funds.

What is your top tip for a rookie just starting out on their investing journey?—Julia

Above all, don't accept the "herd view" of any investment. Start on your journey with a sceptical take on what the crowd thinks. Then, test your view against the evidence and be prepared to change your view quickly. Because of how we evolved, human beings overestimate the probability of stable conditions continuing and underestimate the chance of sharp changes.

An investment that performed well last year isn’t necessarily going to do so next year, and forever. But the human mind is biased to expect it to do so, just because that good experience is a recent memory. "Question authority!" is a good motto for the rookie, but even experienced investors need to remain open to all the evidence of human biases, including our own ones.

If the market struggles, how likely is it that the companies listed will cut their dividends? Or do you feel like they are big enough to sustain a downturn in the economy?—Kurt

New Zealand companies historically pay high dividends to attract capital (investors' money), but the level has been creeping down recently. If company profits drop, they may need to keep lowering dividends and instead, re-invest in themselves rather than paying out a big share of their profits. But re-investing lays the foundations for better future profits!

Internationally, dividends tend to be substantially lower than in NZ, and investors look mainly for share price growth to obtain a decent total return. A company may increase its dividend if it sees no attractive investment opportunities and is "out of ideas." In that scenario, a high dividend is probably a negative sign, as the management is effectively saying "we don't have any ideas how to use our profits for growth, so we might as well return them to you!"

Ok, now for the legal bit

Investing involves risk. You aren’t guaranteed a return, and you might lose the money you started with. Before investing, you should read your fund’s product disclosure statement. It contains the investment objectives, risks, fees and other information. You should carefully consider this information in relation to your investment time frames and goals.

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