Managed Investment Schemes: for Investors
We look at Managed Investment Schemes and consider whether contributory or pooled funds are for you. Here’s the low-down on what’s what!
Managed Investment Schemes: for Investors
We, at Acumen Finance, know that, as a borrower, you won’t really need to know the difference between the types of Tier 2 lenders, because we’re the people who can put you together with the Tier 2 or maybe even Tier 3 lenders who can underwrite your commercial property, investment property, or even development project financing loans. However, in our Part II: Tier 2 Lending Limitations, we touched on a couple of Tier 2 investment classifications, namely that of Managed Investment Schemes and its subcategories: pooled and contributory. We realise that we may have piqued your interest in MISs as an investment strategy. If so, here is a quick overview of what they are and how they work.
There’s a wide variety of lenders who fall into the Tier 2 category. Not only are credit unions and building societies classified as Tier 2 lenders, but there are other investment schemes that fall under this designation too. A quick reminder… some Tier 2 lenders are somewhat “removed” from the traditional banking scene, manifesting in the form of Tier 2 Managed Investment Schemes. Regardless of their differences, though, all are ASIC-regulated (Australian Securities and Investments Commission). APRA (Australian Prudential Regulation Authority) still looms large over the entirety of the financial sector, but rather than being under their regulatory thumb, with APRA’s guidance, ASIC’s primary ambition is to protect all parties involved, including customers, investors, and creditors. In the Tier 2 domain, APRA simply observes from afar to ensure that unsuspecting consumers and investors are not swindled in their dealings.
That said, you’re probably wondering what a Managed Investment Scheme actually is. So, let’s get down to business.
What is a Managed Investment Scheme?
Probably the first, best question is, ‘What is it?’ Well, a Managed Investment Scheme (MIS) is a scheme that allows a group of investors to contribute money or substantial equal collateral, like a physical asset, in return for the rights to the benefits that come from the investment. So, if it’s a fund that promises X-percentage-return per annum for those who contribute X-amount of dollars throughout the year, that is their legally bound agreement and subsequent ‘right’. It goes without saying that all of the contributed funds are amalgamated into one giant pot of gold, which experts and specialists, working for various organisations, utilise to work on building a profit for everybody involved.
It’s a popular investment method which addresses the investment goals of both less-experienced and wealthy investors, giving them access to a plethora of assets that they might not usually have access to, otherwise. Plus, it can drastically diversify their portfolio across asset classes. It’s potentially a win-win path to traverse, mind you, with the obvious, investment-wide risks. There are, of course, certain rules and regulations surrounding the Managed Investment Schemes here in Australia. Take a look.
Section 9 of the Corporations Act 2001 (Cth) contains the definition of a Managed Investment Scheme, which must have three particular features:
● Investors contribute money or money’s worth as consideration to acquire rights (interests) to benefits produced by the scheme (whether the rights are actual, prospective or contingent, and whether they are enforceable or not);
● Contributions are pooled, or used in a common enterprise, to produce financial benefits, or benefits consisting of rights or interests in property, for the people (the members) who hold interests in the scheme (whether as contributors to the scheme or as people who have acquired interests from holders); and
● Members do not have day-to-day control over the operation of the scheme (whether or not they have the right to be consulted or to give directions).
So, there’s the ‘official’ definition courtesy of the government and regulatory bodies surrounding Managed Investment Schemes; a concept originally brought into legislation in 1998 - July, to be specific - through the Managed Investments Act (Cth), which was brought in to replace the aged regime of prescribed interest (Corporations Act 2001). It made a few additional changes to the existing legislation which would help to ensure that investors were protected (or, as much as they could be in the investment landscape), including:
● The licensing and surveillance of scheme operators by a regulator;
● The scheme operator’s liability to investors;
● Registration requirements for certain schemes; and
● The separation of scheme assets from those of the scheme operator.
Did You Mention Two Categories?
I did! So, picture this, my friend: you’ve been doing pretty well on your investments over the last couple of years, or you’ve suddenly come into a lump-sum of cash. Taking a look at your best options, you decide that a Managed Investment Scheme is the best way to turn cents into dollars and dollars into piles of cash. Then you get hit by a choice… a contributory or pooled commercial mortgage fund. Uh oh! Which one?!
It’s alright. We’ve got the information part covered.
Contributory Mortgage Schemes
Okay, so first up we’ve got the contributory scheme, which remains open until investors have invested enough capital to facilitate a loan and take mortgage security over an individual asset. Said asset could take the form of a small retail or commercial property or even a chunk of an industrial estate. If you plan on being part of a contributory trust, do bear in mind that you’ll most likely need to produce a greater capital commitment than you would if you were taking part in a pooled mortgage scheme, and like all loans and mortgages, the investment term will vary across the board.
Usually, if you’re in one of these schemes, you’ll receive your returns on a monthly basis ─ making it a pretty handy revenue stream, if you’re looking to up the monthly coffers. However, you won’t actually be able to withdraw your initial investment until the commercial mortgage loan itself is repaid, which tends to be between six months to two years (subject to loan terms, that is).
Pooled Mortgage Schemes
On the other side of the fence, pooled commercial mortgage investment schemes hook up investor capital and potential returns to a pool, or group, of loans. The premise is that a pooled fund spreads the risk over a myriad of loans so that the investment is not dependent on the performance of just one specific loan. The deal here is that if you’re investing in a pooled scheme, your personal commercial property investment portfolio gains a whole load of loans without the admin ─ because somebody else if dealing with the capital.
By their very nature, a pooled scheme requires a smaller initial investment than its contributory cousin, which means that it is also more accessible to those at the beginning of their investment journey or to people who are just a little cautious with their cash. The pooled schemes are also in the hands of, usually, a seasoned fund manager who will be an expert in the given field, ensuring that your investment makes a profitable return. And, in comparison to contributory schemes where the money is tied up for a longer period of time, you tend to be able to withdraw your initial investment relatively sooner after the initial holding period has passed.
Which Should You Go With?
Well, like anything in investment, that’s entirely your decision to make. It’s subjective. What we can tell you is that Managed Investment Schemes are primarily designed to pay investors a, hopefully, hefty monthly income, so if that’s what you’re looking to do, either option is likely good for you. You’ll find that a contributory mortgage scheme gives you a little bit more control over the asset choice, while a pooled mortgage scheme surrenders the power of choice to a fund manager but spreads the risk of each loan across an entire portfolio.
While we, at Acumen, do not organise or manage either of these fund types, our squadron of specialists have access to the details of the best Tier 2 lenders in Australia who do; and we know exactly who will and will not underwrite a loan to assist you on your commercial property investment journey. We’ve got the ability to connect you to a sophisticated pool of Tier 2 lenders and the know-how to fast-track your loan application and significantly increase the likelihood of approval. So, contact us today, and we’ll kick-off the loan pre-approval process and get you ready to take on a commercial property investment with confidence.