Managed funds, ETFs and portfolio construction
This domain asks whether you can choose and combine collective investments sensibly: how they are regulated, what they cost, how ETFs differ from unlisted funds, and how asset allocation drives client outcomes.
Structure and regulation
Managed investment schemes are Part 4 FMC Act products. Each has a licensed manager, a licensed supervisor independent of the manager who holds the assets and monitors compliance, and a Product Disclosure Statement. Most retail funds and KiwiSaver schemes elect Portfolio Investment Entity (PIE) status, capping tax on investment income at 28% and taxing it in the investor's hands at their prescribed investor rate.
ETFs are exchange-traded funds: units in a managed fund quoted on NZX, bought and sold through a broker at a market price that can sit at a small premium or discount to net asset value. Watch tracking error, bid-ask spread, and the fact that brokerage applies on every trade.
Portfolio construction
Expected return and risk come from the asset mix more than from manager selection. Diversification works through imperfect correlation; rebalancing restores target weights and enforces a disciplined sell-high, buy-low behaviour. Match the allocation to the client's horizon and capacity for loss, not just their stated attitude to risk.
Worked example
$200,000 invested for 20 years at a 6% gross return. At a 1.30% total fee the net return is 4.70%, giving roughly $501,000. At 0.40% the net return is 5.60%, giving roughly $595,000 - about $94,000 more, from fees alone. That compounding gap is why cost is a suitability issue, not a detail.
Traps
Confusing PIE tax with a 28% total tax burden. Assuming an ETF always trades at NAV. Judging a fund on past performance without checking fee and strategy changes. Rebalancing without considering tax and transaction costs.