Investment markets are the backbone of the global financial system, enabling capital to flow from investors to businesses and governments. Financial advisers must understand the structures, mechanisms, and key participants that shape these markets in order to guide clients effectively. This module provides a comprehensive foundation in how investment markets operate, with a particular focus on managed funds and Australia’s superannuation products. We examine how managed funds pool resources from many investors, diversify risk across asset classes, and provide access to opportunities that individual investors might not achieve alone. The regulatory environment – in Australia and abroad – is also explored to highlight how bodies like ASIC, the FCA, and the SEC ensure market integrity and investor protection. In addition, the module addresses market operations (such as how securities are issued and traded), the advantages and limitations of various investment vehicles, and the role these products play in constructing client portfolios. Finally, we discuss emerging trends in funds management, including the rapid rise of Exchange-Traded Funds (ETFs) and the growing emphasis on sustainable investing. By mastering these foundations, Australian financial planners and advisers will be better prepared to deliver informed, compliant investment recommendations to their clients, in line with professional standards and Continuing Professional Development (CPD) requirements for the industry.
Understanding Investment Markets: Structure and Participants
Investment markets refer broadly to the venues and systems where financial securities are created, bought, and sold. These markets encompass equities (stocks), fixed income (bonds), cash instruments, commodities, and a range of derivative contracts. The structure of investment markets can be viewed in two main layers: the primary market and the secondary market. In the primary market, new securities are issued and sold for the first time – for example, when a company lists on the Australian Securities Exchange (ASX) through an initial public offering (IPO) to raise capital. In the secondary market, existing securities are traded between investors; this is the daily buying and selling of shares, bonds, and other instruments on exchanges or over-the-counter venues, where prices fluctuate based on supply and demand. Together, primary and secondary markets provide the mechanisms for capital formation and liquidity, allowing investors to deploy funds and to exit investments when needed.
Key participants drive and shape these markets. On the supply side, we have issuers – corporations issuing stocks or bonds, governments issuing treasury securities, and other entities offering investment products (such as fund managers launching new funds). On the demand side, there are investors, broadly divided into retail and institutional segments. Retail investors are individual members of the public investing their personal funds. Institutional investors are large organizations investing on behalf of others – examples include superannuation funds, pension funds, insurance companies, banks, endowments, and hedge funds. Institutional investors control a significant share of market assets and often have sophisticated strategies and resources. In Australia, for instance, the superannuation (pension) funds sector is a major institutional player with total assets around A$3.9–4 trillion as of 2024, making it one of the largest pension systems in the world. These institutional funds deploy capital across both domestic and global markets, influencing demand for various securities.
Another critical set of participants are the financial intermediaries that facilitate market operations. These include stock exchanges (like the ASX, NYSE, NASDAQ, LSE, etc.), which provide the platforms and rules for trading to occur in an orderly, transparent manner. Brokers and dealers act as middlemen: brokers execute trades on behalf of investors, while dealers (market makers) stand ready to buy or sell from their own inventories, providing liquidity. Investment banks play a pivotal role in the primary market by underwriting new securities issues and advising issuers. Custodians and clearing houses work behind the scenes to ensure that once trades are struck, the securities and cash are exchanged properly – for example, the ASX uses a clearing system (CHESS) to settle equity trades in Australia. Rating agencies can influence bond markets by assessing the creditworthiness of issuers, thus affecting investor perception of risk.
Importantly, regulators and government bodies are participants in the broader sense that they set the rules of the game and oversee compliance. In Australia, the primary market regulator is the Australian Securities and Investments Commission (ASIC), which administers laws like the Corporations Act and ensures fair and transparent markets. ASIC oversees financial services providers and market operators, conducts surveillance, and can enforce actions against misconduct. Alongside ASIC, the Australian Prudential Regulation Authority (APRA) supervises banks and insurance companies, and in the investment realm, it prudentially regulates superannuation funds to ensure they are managed soundly for the benefit of members. We will compare these to regulators in other jurisdictions later, but in all cases the presence of regulators is fundamental to maintaining investor confidence and market integrity.
The mechanisms of investment markets revolve around price discovery and liquidity. Through the continuous interactions of buyers and sellers – each with their own information and motivations – markets determine prices for securities. This price discovery mechanism allocates capital to its most efficient uses over time. Liquidity, meaning the ease with which assets can be bought or sold without significantly affecting their price, is crucial. Liquid markets (such as large-cap equities on major exchanges) enable investors to enter and exit positions readily, which is one reason why collective investment vehicles (like managed funds) prefer to invest in liquid markets for open-ended products. Less liquid markets (for example, direct property or certain credit instruments) may require special structures or risk controls if they are included in investment funds.
In summary, understanding the structure of investment markets – primary vs secondary markets – and the roles of participants – from issuers and investors to intermediaries and regulators – is the first step in grasping how managed funds operate within this ecosystem. Financial advisers need this big-picture perspective to appreciate where and how the investment products they recommend fit into the broader market landscape. For instance, when recommending an Australian equity managed fund to a client, an adviser should recognize that the fund’s performance and liquidity will depend on the functioning of the ASX and global equity markets, the efficiency of the fund manager’s trades, and the regulatory protections in place that govern those transactions.
Managed Funds Explained: Structures and Types
Managed funds are investment vehicles that pool money from multiple investors to purchase a diversified portfolio of assets. They are commonly referred to as collective investment schemes, and in Australia the legal term is “managed investment schemes (MIS)” under the Corporations Act. The core idea is that investors contribute capital to a fund, and in return receive units or shares that represent a proportional interest in the pooled portfolio. A professional fund manager (or a management team) then makes the day-to-day investment decisions – such as which stocks or bonds to buy and sell – according to the fund’s stated strategy and objectives. Investors in a managed fund do not exercise control over individual investment decisions; instead, they entrust those decisions to the manager (in Australian terminology, the manager often acts as the “responsible entity” of the scheme). This structure allows even small investors to access investment opportunities and expert management that would be difficult to achieve on their own.
Managed funds can be structured in various legal forms depending on the jurisdiction and the preferences of the fund sponsor. In Australia, most managed funds intended for retail investors are structured as unit trusts. Under a unit trust, the fund is established via a trust deed, a trustee or corporate responsible entity operates the fund, and investors hold units in the trust. The responsible entity must be a licensed entity (holding an Australian Financial Services Licence) and has fiduciary duties to act in the best interest of investors. This model was introduced by the Managed Investments Act 1998 and remains the dominant structure for Australian funds. In some cases, particularly for wholesale or institutional funds, a trust structure may be unregistered (not offered to the general public) but still subject to general corporate and trust law.
Other countries employ different structures: for example, in the United States, the prevalent structure is the open-ended investment company (often simply called a mutual fund company), regulated under the Investment Company Act of 1940. In Europe and the UK, funds can be structured as Investment Companies with variable capital (ICVCs) or as unit trusts or contractual funds, and must adhere to regulations such as the UCITS directives for retail funds. Notably, Australia has recently introduced a new optional structure called the Corporate Collective Investment Vehicle (CCIV), aiming to offer a company structure for funds more comparable to international models. Regardless of the legal form – trust or corporate – the function is similar: assets are held separately on behalf of investors, and professional managers invest those assets according to defined mandates.
Open-end vs Closed-end: Managed funds generally come in two broad varieties. Open-end funds are by far the most common; these funds continually issue and redeem units or shares at the fund’s Net Asset Value (NAV) per unit. The NAV is calculated (typically daily) by taking the total market value of the fund’s portfolio, minus any liabilities, and dividing by the number of units outstanding. When investors invest new money in an open-end fund, new units are created; when investors redeem (withdraw) their money, the fund pays out cash and cancels the units. Open-end funds therefore expand or contract based on net investor flows, and they must maintain enough liquidity (or access to liquidity) to meet redemptions. Most traditional mutual funds and many exchange-traded funds (ETFs) function effectively as open-ended vehicles (ETFs have a unique mechanism involving authorized participants, discussed later, but they still are backed by daily creation/redemption at NAV in the background).
By contrast, closed-end funds raise a fixed amount of capital through an initial offering and then the fund units or shares trade on a secondary market (like a stock exchange) without daily redemption to the issuer. A closed-end fund does not issue or redeem shares after its launch (except perhaps through occasional secondary offerings or buybacks). This means the market price of a closed-end fund can deviate from its underlying NAV – it may trade at a premium or discount depending on supply and demand. Closed-end funds can be advantageous for less liquid assets (since the manager doesn’t have to handle daily redemptions) but are less common in some markets and can introduce an additional layer of price volatility for investors. In Australia, listed investment companies (LICs) and listed investment trusts (LITs) on the ASX are examples of closed-end fund structures; they are not “managed investment schemes” in the strict regulatory sense, but they serve a similar purpose of pooling investments.
Types of Managed Funds: There is a wide variety of managed funds catering to different asset classes and strategies. Common types include:
Each type of managed fund has a specific role it can play in a client’s portfolio, and each comes with its own risk-return characteristics. For example, an equity growth fund offers higher potential returns but greater volatility, whereas a fixed-income fund might provide stability and income. By understanding the structures and types of funds, advisers can better match investment products to a client’s goals and risk tolerance. It’s also important for advisers to know the specific terms and operations of funds they recommend – for instance, whether a fund is open-ended (with daily liquidity at NAV) or closed-ended (with market-driven pricing), or if it’s actively managed by a team of analysts versus passively tracking an index. These factors will influence performance expectations and how the fund should be used in planning.
Superannuation Products and Their Role in Australia
No discussion of managed funds in Australia is complete without covering superannuation, the nation’s compulsory retirement savings system. Superannuation (or “super”) is a form of managed investment designed specifically for retirement, with unique regulatory and tax structures. Employers in Australia are required to contribute a percentage of employees’ wages (currently 11% rising to 12% as of 2025) into superannuation funds on the employees’ behalf. Individuals can also make additional contributions (within certain limits) to boost their retirement savings. These contributions are invested over the course of the individual’s working life, and the accumulated balance (plus investment earnings) is typically accessible upon retirement or under specific conditions (like reaching preservation age or severe financial hardship).
Superannuation products are offered by various types of funds, which can be seen as a subset of managed funds with special rules. The main types of super funds include:
From a structural perspective, large superannuation funds (industry, retail, public sector, etc.) operate similarly to managed funds: they pool members’ contributions and invest across a diversified portfolio. In fact, many super funds invest into underlying managed funds or mandates – for example, a super fund’s international shares option might be implemented by allocating money to an external global equity fund manager. Super funds typically offer investment options to members, such as growth, balanced, conservative, Australian shares, international shares, fixed interest, etc., which correspond to different allocations. Each option is effectively like a managed fund unit pool within the superannuation trust. The difference is that superannuation has additional regulatory constraints and objectives: preserving capital until retirement, providing insurance benefits within super, adhering to contribution and withdrawal rules, and operating under the SIS Act (Superannuation Industry (Supervision) Act) and related regulations.
One distinguishing feature is the tax structure: contributions and investment earnings in superannuation are taxed at concessional rates (generally 15% on earnings in accumulation phase, and tax-free for many retirees in pension phase, subject to caps). This makes super an extremely tax-effective investment vehicle for retirement, albeit with restricted access. Advisers in Australia will routinely strategize around contributing to superannuation versus investing outside super, to maximize this tax advantage for long-term wealth building.
It’s important to note that superannuation funds are explicitly excluded from the definition of managed investment schemes under the Corporations Act. This means they are regulated under separate legislation and oversight (APRA/ATO and trust law), not by ASIC’s MIS regime. Nonetheless, from an investment perspective, they function as large pooled funds. APRA closely supervises super funds’ prudential soundness, requiring trustees to maintain adequate risk management, governance, and to act in members’ best financial interests. ASIC plays a role in consumer protection for superannuation, ensuring that funds provide proper disclosure to members and that financial advice regarding super meets the required standards.
For financial planners, superannuation is often central to a client’s investment portfolio – especially in terms of retirement planning. By law, a significant portion of most working Australians’ savings flows into super, so advisers must understand how these funds operate, the product options available (e.g., MySuper default products vs. Choice investment options), and how to align a client’s super investments with their overall strategy. Advisers also help clients navigate decisions like consolidating multiple super accounts (to avoid duplicate fees), choosing appropriate investment options in super (to match risk profile and life stage), and understanding the rules around contributions and withdrawals.
In summary, superannuation products exemplify the concepts of managed funds in a retirement context. They pool contributions, invest across diversified assets, and are governed by a robust regulatory framework tailored to protecting retirement savings. Mastery of superannuation fundamentals – from how different fund types work to the tax and regulatory nuances – is essential for Australian financial planners, as it enables them to give sound advice that maximizes clients’ retirement outcomes while ensuring compliance with the stringent laws around super.
Market Operations and Trading Mechanisms
To appreciate how managed funds function in practice, advisers should also grasp the basics of market operations – that is, how securities are bought, sold, and valued within the markets where funds invest. A few key concepts and mechanisms include: price quotes, order execution, clearing and settlement, and valuation (pricing) of fund units.
When a managed fund invests in publicly traded securities (like stocks or bonds), it interacts with the market through brokers and trading platforms. Securities markets today are highly electronic. On an exchange such as the ASX, buyers and sellers place orders (via their brokers) into a central order book. The exchange’s trading system matches buy and sell orders according to price-time priority – the highest bid (buy price) matches the lowest ask (sell price) when they converge, and a trade is executed. This continuous auction mechanism facilitates price discovery, where the current market price reflects the collective views of all participants about the value of that security. For less frequently traded securities or over-the-counter (OTC) instruments (like corporate bonds or derivatives), price discovery may occur through dealer networks or periodic auctions rather than a central exchange.
Clearing and settlement are the post-trade processes that ensure the trade is honored – the buyer gets the securities and the seller receives payment. Clearing houses step in as intermediaries to manage the risk if either party defaults. In Australia’s equity market, ASX Clear performs this function, and settlement typically occurs two business days after the trade (T+2), with CHESS recording the change of ownership. Managed funds rely on these market plumbing processes to ensure their trades (often large block trades) settle smoothly. Custodian banks hold the fund’s assets and cash, and they work with clearing systems to deliver securities versus payment when trades settle. This back-office aspect might seem far removed from an adviser’s concern, but it is crucial for understanding risks like settlement failure or liquidity crunches. For example, during extreme market volatility, settlement systems and liquidity can be stress-tested – in 2020’s pandemic turmoil, we saw short periods where bond market liquidity dried up, affecting bond fund operations globally. Regulators now require robust liquidity risk management for funds to handle such situations.
The valuation of managed fund units is another operational aspect. Open-end managed funds strike a daily unit price (NAV). This is done by taking the closing market prices of all securities the fund holds (for that day), adding any income accrued, and subtracting fees or liabilities, then dividing by the number of units. It’s important for advisers and clients to understand that the price at which they invest in or exit a fund is based on these end-of-day valuations (for unlisted managed funds). If an investor submits a request to withdraw $100,000 from a managed unit trust today, they will typically get tomorrow’s unit price times the number of units that $100k represented (assuming next-day processing). This system ensures fairness – all investors transact at the true underlying value – but it also means fund investors don’t have intra-day liquidity or a guaranteed price at the moment of request (unlike ETFs or stocks, which have real-time prices).
Bid-offer spreads and liquidity gates: Some managed funds may have buy/sell spreads – small percentage costs added to the unit price when entering or exiting – to account for trading costs the fund incurs. In normal conditions these are minor, but in stressed markets spreads can widen. If underlying assets are very illiquid (e.g., direct property or certain credit loans), a fund manager might even freeze withdrawals or invoke a delay (often called gating) to protect remaining investors from harmful effects of a fire-sale. A notable example occurred during the Global Financial Crisis and more recently during the COVID-19 market panic: some property funds in Australia and the UK temporarily suspended redemptions because they could not confidently value or sell assets to meet withdrawals. Regulations generally allow this under strict conditions to ensure fairness – better to pause withdrawals than to sell assets at distressed prices which would disadvantage those who remain invested. As an adviser, being aware of these mechanisms helps in selecting appropriate funds for clients and setting expectations around liquidity.
Market indices and benchmarks also play an operational role. Many funds measure their performance against indices like the S&P/ASX 200 (for Australian shares) or the MSCI World Index (for global shares). Index providers continually update these benchmarks to reflect market movements and corporate actions (like companies being added or removed). Passive funds (index funds and ETFs) aim to replicate an index’s performance by holding securities in the same proportion as the index. Active funds use benchmarks as a yardstick but try to outperform them through skillful selection or timing. In either case, understanding how indices work (market capitalization-weighted vs equal-weighted, etc.) is important for interpreting fund performance and risks (for instance, a fund tracking a market-cap weighted index might become heavily concentrated in a few large companies if the index is, which is something an adviser might want to know).
Finally, when discussing market operations, we should mention globalization and time zones. Markets around the world are interlinked. An Australian managed fund might invest in international markets, which means when the ASX is closed, those overseas markets (US, Europe, Asia) may be trading and affecting the value of the fund’s portfolio. Fund managers often use “fair value” pricing adjustments for international assets to account for events that happen after a foreign market’s close but before the fund’s NAV time – for example, if the US market surges overnight, an international fund might adjust up the value of its holdings rather than just using stale closing prices. These details ensure accuracy in unit pricing and equitable treatment of investors.
In conclusion, the operational mechanics of trading, settling, and pricing are the gears that keep investment markets and managed funds running smoothly. Advisers do not need to know every technical detail, but a solid grasp of concepts like how fund unit prices are determined, what could cause a fund to suspend withdrawals, or how an ETF maintains its price in line with NAV, will significantly enhance an adviser’s ability to explain investments to clients and navigate product selection prudently. This operational awareness also underpins compliance – for instance, knowing that a thinly traded small-cap fund might be harder to exit quickly helps ensure any recommendation of that fund to a client aligns with the client’s liquidity needs and risk tolerance (a key part of “know your product” obligations in best-interest duty).
Advantages of Managed Funds for Investors
Managed funds have become a cornerstone of investor portfolios because they offer several compelling advantages. Here we outline the key benefits that managed funds provide, especially in the context of serving retail clients through financial planning:
In summary, managed funds offer diversification, expert management, broad access, convenience, and efficiency. These advantages align well with the needs of many clients, especially those who are not full-time investment experts. From a financial planner’s perspective, being able to utilize managed funds means you can design robust portfolios tailored to client objectives without having to pick individual securities one by one. It allows an adviser to focus on the high-level strategy (asset allocation, risk management, goal planning) and rely on quality fund managers to execute the security selection within each asset segment.