Managed funds: Look around, shop around
THE Productivity Commission and the banking Royal Commission have both focused on the distinct lack of transparency in many areas of the financial industry.
The $1.2 trillion managed funds sector, where so many retirees have their funds invested, often on the recommendation of their financial adviser, is one of those areas where transparency is distinctly lacking in terms of fees disclosure.
If you don't know what you are paying in fees, if you have your capital invested in a managed fund, it's definitely time to find out.
Research conducted by InvestSMART using data from investment research group Morningstar shows that, at May 2018, out of about 5300 Australian managed funds that have a 10-year investment history, 76 per cent had underperformed their industry standard benchmark by an average of 1.75 per cent per annum.
What's staggering is that there is currently about $330 billion of investors' capital sitting in these under-performing funds alone, which are charging average fees of 1.73 per cent per annum.
While average management fees on some investment products have been falling in recent times, many investors in managed funds are often paying higher fees than those in other funds largely providing the same investment exposures. What's worse is that the highest management fees being charged are by the actively managed investment funds whose primary mandate is to outperform against their market benchmark. In most cases, they haven't.
Fees can be controlled
The most important dimension to the managed funds fees issue is investor apathy. Many Australian investors are paying the ultimate financial price by choosing to keep their capital in under-performing managed funds instead of shopping around for better alternatives.
While it's impossible to predict the future performance of a particular fund, what most investors are ignoring is that the amount of fees they are paying paid can be controlled by switching into funds that, by virtue of charging lower management fees, will outperform their competitors. Some will outperform their set benchmarks in different years, but over longer periods they probably won't. But the key is to choose funds that offer the same or similar investment exposure, such as to Australian large cap or mid cap stocks, or to global markets, and that charge lower management fees.
The easiest way for investors to compare between different funds covering the same investment category is by matching one or more funds to the market benchmark they are measuring their performance against.
InvestSMART has just released an industry-first tool, Compare Your Fund (investsmart.com.au/ compare-your-fund), which allows investors to compare the fees and performance of nearly 9000 Australian investment funds online.
The free-to-access tool can analyse the performance of managed funds, super funds and pension funds against peers and industry standard benchmarks, and also allows investors to assess fund fees against comparable funds.
InvestSMART's funds research is telling. It shows that 96 per cent of managed funds in the multi-sector moderate category have underperformed the benchmark Morningstar Aus Msec Moderate Total Return AUD comparison index over the last 10 years by an average of 1.54 per cent per annum, and are charging average annual fees of 1.58 per cent.
Similarly, 92 per cent of funds in the multi-sector growth category have underperformed the Morningstar Aus Msec Growth Total Return AUD comparison index over 10 years by an average of 1.62 per cent, and are charging average fees of 1.69 per cent.
The story doesn't change across other fund categories, except that the total percentage of under-performing funds does reduce.
It's evident to most investors that the amount of fees paid will have a direct impact on returns over time. Yet this becomes even more stark when an investment is left in an under-performing fund over a long period of time.
The key message for investors is not to stay in under-performing managed funds. They are costing you better returns. Look around and shop around.
Tony Kaye is the editor of Eureka Report, which is owned by listed financial services company InvestSMART. www.investsmart.com.au