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Investing basics: How to decode the name of a managed fund

Emma Rapaport  |  05 Jul 2018Text size  Decrease  Increase  |  
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Real return, pure, long/short, active, hedged. The names of managed investment funds are often meaningless to typical investors. Often no more than a complicated cocktail of obscure terms that confuse rather than illuminate.

Some, such as the Magellan Global Fund (MGE), are descriptive and informative: a managed fund offered by asset manager Magellan, which invests companies outside Australia. And yet others can be perplexing and give the impression that the investment community has a language of its own.

How about the "OnePath OA FR IP-OP Tax Effective Inc" or the "Orbis Global Eq LE Fd (Aus Registered)" - catchy titles, aren’t they?

To help you wade through the fog we've scanned through the Morningstar’s powerful  Fund Screener and compiled a helpful glossary of simple definitions. 

Investing is hard enough—don’t let the complex names trip you up.

How do asset managers select the perfect name?

According to the corporate watchdog, the Australian Securities and Investments Commission, fund managers must follow several rules when deciding on a fund name. ASIC told us that first, fund managers must avoid using the exact same name as another fund; second, the fund name must exclude words such as “bank”, or “credit union”; and third, the name "should not be misleading". This leaves the field open for creativity.

To decide on a name, fund managers will typically scan though a glossary of financial terminology and select a name that describes what the fund is trying to achieve and/or in which assets the fund is invested. For example, the Aberdeen Australian Equities Fund (5685) is an investment fund set up by asset manager Aberdeen. It invests in companies listed on the Australian Securities Exchange. It basically does what it says on the tin.

Followers of the investment management community will also notice that managed fund names go through trends as managers turn to their peers for inspiration. "If a particular investment strategy (and its name) becomes successful, then everyone else follows suit," Morningstar senior product manager Jason Prowd says.

You can liken it to trends in baby names. The name "Charlotte" went through a spike in popularity in 2015 following the birth of Princess Charlotte of Cambridge, the daughter of Prince William and Kate Middleton.

There's also among some segments of the managed fund sector a move away from descriptive terms. Managers are seeking more marketable names in a bid to stand out from the crowd. Perhaps you’ve considered investing in "Spaceship Voyager" fund (which suggests the returns are out of this world). Or how about the “5 Oceans Fund”? (Is that likely to sink?) Failing that, there’s always the AtlasTrend Online Shopping Spree. This trend for more exotic names is also present in the ETF community, where you can park your money in the “VanEck Vectors MSCI World Ex Australia Quality ETF” (QUAL) or the “BetaShares Global Cybersecurity ETF” (HACK).

Why are some managed fund names so confusing?

So how did we get to the point where people need a financial dictionary to decrypt fund names? While there's no clear answer, Morningstar’s Prowd argues that it reflects an industry that has become needlessly complicated and removed from everyday investors.

"The investment industry likes using financial jargon and technical language," he says. "It of course has meaning, but people in the industry have forgotten that investors don't necessarily understand it."

Prowd adds: "It's a tough dance in the finance industry when you're reaching out to consumers – you want to show that you take your responsibility seriously, but you also want to connect with people." 

A classic example is the use of the word “alpha” in a fund name. The term alpha is used to indicate that the fund manager is actively managing your money with the goal of outperforming the benchmark. While this word is commonly used by the investment management community, it is unlikely that the average person could tell you what it means.

Brain maze

Fund managers only have to follow a couple rules when choosing a fund name, leaving the field open for creativity 

Vanguard head of product strategy Balaji Gopal says despite the profusion of technical language and jargon, fund managers are tending these days towards plain English and transparency.

"When naming our managed funds and ETFs we’re focused on being as clear as possible in describing what each fund offers investors," Gopal says. "Simply put, we want our products to be true to label. Beyond describing fund characteristics, we also look to communicate what value the fund is delivering investors."

Gopal does, however, urge investors to do their homework, look beyond the name, ensure they really understand what a fund offers, how it works and crucially whether it supports their long-term goals. "A good rule of thumb: if you don’t understand it, don’t invest in it."

What are those abbreviations after the fund name?

You may have noticed that some managed fund names also include a series of abbreviated terms such as “Tr”, “WS” or “PPSI-BT” – and unless you’re in the know, these could confuse you even further.

Abbreviations are included for two main reasons:

1. Where a fund manager wants to offer a fund that is identical to another fund but has a different fee structure – e.g the Russell Emerging Markets Fund Class A and the Russell Emerging Markets Fund Class B.

2. Where a fund is offered via a specific investment platform. For example, the ANZ OA IP-Vanguard Growth Index EF means that the managed fund is offered to investors, via a financial adviser, who can purchase the fund via the ANZ OneAnswer platform. IP stands for investment portfolio, indicating that you're buying into an investment trust, not a pension fund, and EF stands for entry fee, as opposed to NE, which stands for nil entry. When you're searching for a fund to invest in directly, try an avoid these platforms and search for the flagship (original) fund.

Fund managers are yet to agree on a uniform list of definitions for these abbreviations, but here are some of the more common ones:

  • Acc – stands for accumulation  
  • Dis – stands for distribution 
  • Fd - stands for fund 
  • EF – stands for entry fee 
  • Eq – stands for equity 
  • Hdg or Unhdg – stands for hedged or unhedged 
  • IP – stands for investment portfolio 
  • Inc  stands for income 
  • NE – stands for nil entry 
  • – retail, meaning that the fund is aimed at personal investors. These types of funds generally have a lower minimum investment amount. 
  • Tr – stands for trust 
  • W or WS – wholesale, meaning that the fund is aimed at corporate investors and superannuation funds.

Decoding managed fund names: a glossary

Absolute Return – a fund that aims give investors decent returns in both rising and falling markets. To do this, they invest in a wide range of asset classes and use various investment strategies, some of which can be complicated and risky. We explain everything you need to know about absolute return funds here.

Active – refers to a style of management where a manager or a team of managers research and selectively pick assets to invest in with the goal of outperforming the market. The opposite of active management is passive management where managers attempt to mirror the performance of an index.

Alpha – is a measure of the difference between a fund's actual returns and its expected performance, given its level of risk as measured by beta, which is a measure of the volatility, or systematic risk, of a security or a portfolio in comparison to the market as a whole. An investment fund that includes the word “alpha” will typically refer to the fact that the investment managers are actively managing the fund and are attempting to deliver returns above the index.

Blue Chip – refers to companies that are considered to be high quality, established and financially strong. Examples of these on the Australian Securities Exchange are the Big Four banks, BHP Billiton, Rio Tino and CSL.

Concentrated – refers to a type of fund that holds a lower number of stocks, typically between 20 – 50.

Emerging Market – refers to a fund that invests in financial markets of a developing country. Examples include India, China, Mexico and Argentina. Some managers consider this a higher-risk investment sector because of potential political and economic instability, short investment history and illiquidity. We explain everything you need to know about emerging markets here.

Equity (+ small, mid and large cap) – refers to a fund that invests in the share market by buying or selling stocks in companies listed on a given exchange – e.g the ASX. An equity fund can invest in local and/or international exchanges and can focus on a specific industry or sector. They can also be sub-categorised by market capitalisation (small-cap versus large-cap shares) and investment style (value versus growth). According to Morningstar, in the Australian market, shares that make up the top 70 per cent of market cap are classified as large cap; the next 20 per cent as mid cap; and the shares in the bottom 10 per cent as small cap.

Fixed Income - refers to a fund that invests primarily in fixed-income securities such as government debt and corporate debt. These debt investments typically involve an investor lending money to an entity (government or corporation) that borrows the money for a defined period at given interest rate (this can be fixed or variable). 

Hedged and Unhedged – not to be confused with a “hedge fund”, which is a specific type of fund only open to wealthy investors. A hedging strategy involves investing in one asset to offset losses in another, this typically involves international currency movements. Unhedged funds will not incorporate this strategy.

Global (or ex-Australia, international, overseas) – a type of fund that invests in assets outside Australia.

Income – refers to an investment strategy in which managers focus more on income (a stream of regular dividend payments, for instance) rather than growth (which aims to boost the original sum invested as much as possible). In practice, this means that managers will focus on investing in companies that will deliver investors a consistent dividend.

Passive – refers to a type of fund that tracks a market index, such as the S&P/ASX 200, and therefore does not require “active” management of the portfolio. Because passive funds mirror the performance of a particular index, the performance numbers are very similar, no better or worse. Management fees are considerably cheaper for index-based managed funds. Learn about the 4 top considerations to weigh active versus passive here

Index unaware – a type of fund that makes investments irrespective on what's in the index. An index is a collection of assets that acts like a barometer for its performance. For example, the S&P/ASX 200 is an equity index that includes the top 200 ASX-listed companies, by market capitalisation.

Inflation plus – refers to a fund that seeks above-inflation returns – for example, more than 3 per cent above the consumer price index – as opposed to returning above an index.

Life stage – a type of investment fund that invests in multiple asset classes, the weights of which reflect those that the manager considers appropriate for an investor born in a particular decade – e.g. 1940s. or earlier. The asset allocation of Life-stage funds becomes more conservative over time (investing in more bonds, fewer shares) to reflect the changing risk appetite of their members as they get closer to retirement.

Long short - A long-short fund is a managed investment fund that aims to profit from both rising and falling share prices, whatever the market conditions, by using different strategies to buy stocks. Put simply, taking a "long" position in a stock means buying it in the belief that, over time, the stock will increase in value, and make money for investors.

Multi-Asset (+ Conservative, Moderate, Balanced, Growth, Aggressive) – refers to a type of fund that invests in multiple asset classes such as shares, fixed interest and property. Instead of investing in a variety of managed funds to get a diversified portfolio – one where your risk is reduced if one asset class experiences volatility – this type of fund allows users to invest across a variety of asset classes in a single investment. The mix of assets in the fund will often reflect the risk profile of the fund – e.g conservative, moderate, balanced, and growth. Note that these terms are not standardised. The mix of assets in the balanced portfolio of one manager will not mirror the mix of another balanced fund. Morningstar's categories can, however, provide a good benchmark: 

  • Conservative funds have portfolios with 20 per or less of the investments in growth sectors
  • Moderate funds have portfolios with between 21-40 per cent of their investments exposed to growth sectors
  • Balanced funds have portfolios with between 41-61 per cent of their assets in growth sectors
  • Growth funds have portfolios with between 61-80 per cent of their assets in growth sectors
  • Aggressive funds have portfolios with more than 80 per cent of their assets in growth sectors

Real Return – similar to inflation plus, this refers to a fund that aims to deliver return above inflation.

Value – a type of investment strategy where the manager will seek out shares that he/she believes are undervalued and will soon return to their fair value.

More from Morningstar

• Why value investing works

• How China is opening its doors to global investors

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Emma Rapaport is a reporter for Morningstar Australia.

© 2018 Morningstar, Inc. All rights reserved. Neither Morningstar, its affiliates, nor the content providers guarantee the data or content contained herein to be accurate, complete or timely nor will they have any liability for its use or distribution. This information is to be used for personal, non-commercial purposes only. No reproduction is permitted without the prior written consent of Morningstar. Any general advice or 'class service' have been prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), or its Authorised Representatives, and/or Morningstar Research Ltd, subsidiaries of Morningstar, Inc, without reference to your objectives, financial situation or needs. Please refer to our Financial Services Guide (FSG) for more information at www.morningstar.com.au/s/fsg.pdf. Our publications, ratings and products should be viewed as an additional investment resource, not as your sole source of information. Past performance does not necessarily indicate a financial product's future performance. To obtain advice tailored to your situation, contact a licensed financial adviser. Some material is copyright and published under licence from ASX Operations Pty Ltd ACN 004 523 782 ("ASXO"). The article is current as at date of publication

is an editor for Morningstar.com.au

© 2020 Morningstar, Inc. All rights reserved. Neither Morningstar, its affiliates, nor the content providers guarantee the data or content contained herein to be accurate, complete or timely nor will they have any liability for its use or distribution. This information is to be used for personal, non-commercial purposes only. No reproduction is permitted without the prior written consent of Morningstar. Any general advice or 'class service' have been prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), or its Authorised Representatives, and/or Morningstar Research Ltd, subsidiaries of Morningstar, Inc, without reference to your objectives, financial situation or needs. Please refer to our Financial Services Guide (FSG) for more information at www.morningstar.com.au/s/fsg.pdf. Our publications, ratings and products should be viewed as an additional investment resource, not as your sole source of information. Past performance does not necessarily indicate a financial product's future performance. To obtain advice tailored to your situation, contact a licensed financial adviser. Some material is copyright and published under licence from ASX Operations Pty Ltd ACN 004 523 782. The article is current as at date of publication.

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