Fund fees down 32% over the past decade, but many funds still fall short on performance

Sydney, Australia, 25/11/2024:  Analysis by InvestSMART, a leading online investment adviser and wealth platform, reveals that the average managed fund fee across all benchmarks on Morningstar's database has fallen by 32% over the past 10 years, dropping from 1.54%p.a. as at 31 October 2014 to 1.04%p.a. a decade later. During the same period, the number of managed funds it tracks, including Exchange Traded Funds (ETFs), increased from 3,653 to 4,122, reflecting greater choices for investors. 

The study found significant fee reductions across all managed funds across all asset classes and sectors including: 

• Morningstar diversified funds (conservative to high growth) saw the average fee fall from 1.67%p.a. to 1.02%p.a. - a decrease of 39%. 

• MSCI World ex-Australia fund average fees dropped by 38% from 1.82%p.a. to 1.13%p.a., with fund offerings increasing 74% from 439 to 767, highlighting Australians' increased appetite for international diversification. 

• ASX 200 fund fees fell by 33% from an average of 1.7%p.a. to 1.13%p.a., though the number of funds increased only marginally, from 854 to 873. 

Morningstar Target Allocation Indexes 

Source: Compiled by InvestSMART between 31 October 2014 - 31 October 2024 using Morningstar data  

Investors still paying too much for underperformance 

The analysis revealed that 68.1% of funds underperformed the index that they track by an average of 0.71% in the 10 years to 31 October 2024. Of the funds that track the Morningstar diversified fund indexes only 30.6% managed to outperform their index over that same 10-year period. 

Ron Hodge, CEO of InvestSMART Group, commented: 

"It's encouraging to see fees decline significantly over the past decade, driven by the rise of broad-based index-tracking ETFs, regulatory reforms like FOFA, and increasing competition. However, many funds still charge high fees while failing to deliver on performance for investors. 

"Investing is one area in life where paying more often means getting less in return. Psychologically, we're wired to think the more expensive something is, the better it is. This is not the case when it comes to investing. Investors must understand that fees, not returns, play the most critical role in compounding their wealth over time. The longer you invest, the more those fees impact your portfolio's growth. 

"Technological advancements have enabled low-cost investment alternatives, including robo-advice platforms such as InvestSMART, to leverage low-cost index-tracking ETFs to outperform higher-fee competitors over time." 

Hodge noted that InvestSMART's High Growth Portfolio, which charges a maximum of $550p.a., has delivered an average annual return of 8.67%p.a. over the past 10 years, compared to 6.16%p.a. from 354 competing high-growth or aggressive funds, although past performance isn't a promise of future performance. 

"The secret isn't finding the 'best-performing' fund, it's choosing a low-fee option that aligns with your risk profile and investing consistently over the long term. Fees are the differentiator that compound returns over the long term," Hodge concluded.