Sticking with an under-performing fund can cost you thousands

The following article was written by Tony Kaye, the editor of Eureka Report, which is owned by listed financial services group InvestSMART, and was published in The Australian on September 11, 2018.

Investors in managed funds are suddenly more sceptical about fees and performance in the wake of remarkable revelations of poor practice in the fund management sector. For most investors the challenge is to spot poor performing funds before it’s too late.

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.

Industry research shows that 96 per cent of managed funds in the multisector 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 multisector 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 underperforming funds does reduce. For example, 56 per cent of those in the Equity Australia Large Blend fund category that track the S&P/ASX 200 Total Return AUD index underperformed over 10 years by an average of 0.74 per cent. But the average fees charged per annum are substantially higher at 1.05 per cent.

The performance and fees gap is even wider for those funds in the Equity Australia Real Estate category, which track the benchmark S&P/ASX 200 A-REIT Total Return index.

Over 10 years, 72 per cent of those funds underperformed by an average of 0.79 per cent, but on average charged 1.27 per cent in fees per annum.

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 underperforming fund over a long period of time.

A 1 per cent difference in management fees on a $50,000 investment in a fund returning 10 per cent per annum amounts to $167,000 over 30 years.

Though it may be impossible to predict the future performance of a particular fund, most investors are ignoring the crucial point that the amount of fees they pay 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 key message for investors is not to stay in underperforming managed funds. They are costing you better returns. Look around, and shop around.