Investors waste hundreds of millions of dollars on managed funds

Investors in managed funds are paying hundreds of millions of dollars a year in fees to investment managers who are failing to outperform simple, low-fee index funds.

New figures from major market operator S&P’s SPIVA scorecard shows just how hard it is for “active” Australian share funds to deliver on their promise of “beating the market” in the long term after fees.

Over the past 10 years, only 22 per cent of Australian Equity General funds outperformed the S&P/ASX 200 index, which tracks the top 200 companies on the local bourse. Over five years, fewer than one in five outperformed.

Are active fund managers more likely to back a winner? Not according to new data.Credit: Getty

Betashares, which provides exchange-traded funds (ETFs), estimates investors in actively managed large-cap Australian equity funds are paying almost $750 million more in fees than if they invested in Betashares’ A200 ETF, which tracks the Australian sharemarket and has an annual management fee of 0.04 per cent.

Alex Vynokur, the chief executive of Betashares, says actively managed funds mostly fail to maintain consistent outperformance over multiple time periods.

“In fact, S&P’s SPIVA data shows that the top active managers in one year are unlikely to maintain their top positions in terms of performance in the subsequent five years,” he says. “The reality is that both stock picking and fund manager selection is a tough ask that [even] the experts often struggle with.”

Alex Vynokur, the chief executive of Betashares, says actively managed funds mostly fail to maintain consistent outperformance over multiple time periods.Credit: Louie Douvis

Betashares arrived at the figure of almost $750 million using Morningstar figures for broad Australian share funds and their fee revenue, and comparing that with how much would be paid if the investors had their money with Betashares’ A200 ETF instead.

Not all the $750 million paid in fees is wasted as there will be instances of funds that outperform in the longer term. Some say it is possible to pick winners from among active managers.

Leslie Mao, a director and portfolio manager at WTW Australia, says the firm can identify Australian share fund managers that consistently add value.

WTW is a US Nasdaq-listed company that offers a wide range of professional services, including advising super funds and wealth managers on their investments.

Over three years, about two-thirds of WTW’s rated Australian share managers outperform the market. Over five and seven years, that increases to about 80 per cent, Mao says.

There is short-term performance “noise”, such as market conditions that favour certain managers’ investment styles. However, in the longer term, “skilful stock pickers shine through”, Mao says.

Retail investors, as well as lacking insights into whether a manager is likely to outperform, also pay higher fees than do institutional investors, such as super funds, who have large sums of money to invest.

Chris Brycki, the chief executive of online investment adviser Stockspot, says of the 311 actively managed broad Australian share funds listed on the Morningstar database, 231 underperformed after fees, or 74 per cent, over the past five years.

That is not allowing for investment platform fees that are likely to be paid by small investors, who access the managed funds through financial advisers, Brycki says.

He suspects one of the reasons investors could be attracted to active managers is they like to be told narratives about investing that make sense of what is a sea of confusing data.

“They [fund managers] are these articulate experts who can paint a picture of what will likely happen in the future, but a lot of these predictions, if they do happen, are down to chance,” Brycki says.

• Advice given in this article is general in nature and is not intended to influence readers’ decisions about investing or financial products. They should always seek their own professional advice that takes into account their own personal circumstances before making any financial decisions.

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