Fund Managers Do OK

By Neil Handley

Notwithstanding super funds reporting their biggest losses in almost two decades, fund managers received record fees.

Over $65 billion was wiped of super balances, yet fund managers were still paid about $15 billion.

The biggest losers were workers with their super in higher risk investment options such as Australian and international shares. At the same time, the biggest winners this year look set to be the managers of those share funds. They typically charge higher fees than other managers, which is fair considering their greater expertise (black joke).

Most people, however, have their superannuation in a balanced fund, which lost an average 6.5 per cent this year. At the same time these fund managers skimmed off anything from 1 to almost 3 per cent for doing the job.

The pros are expected to beat the market most of the time. Most of the time, they don’t.

One of the fund industry’s not-so-funny little problems is that most stock-fund managers can’t beat important benchmarks like the All Ordinaries Index. That index represents the average. Yet, only some 20 per cent of managers have beaten the Index over the last 15 years.

That means the vast majority of you, through fees levied against your funds, have been paying professionals for the privilege of earning subpar returns. If fund managers just threw darts at a stock list, you’d expect more of them to match the benchmark.

This is no small matter. Over time, poor performing funds take a huge bite out of what you might have reasonably expected.

The sad fact is that fund investors have the deck stacked against them when it comes to beating the averages. Here’s why:

1. Outgoings:

Fund managers never met a fee they didn’t like. They include, but are not limited to, management fees, custodial fees, auditing fees, directors’ fees and professional-services fees, marketing fees and sales commissions. Such “loads” aren’t reflected in official performance data but are a cost that cuts into your results.

2. Turnover:

In the typical stock fund, 4 out of 5 stocks held at the start of the year are gone by the end of the year. The trading costs subtract an additional figure from a fund’s gains.

In stating this I am reminded of an article in the Australian Financial Review dated October 2000 titled “Strategies and confessions of the market’s professional investors.” The article profiled one of BT Funds Management’s managers called a “senior international economic strategist” who had also been a senior economist with the Reserve Bank of Australia, was a University medallist with a first class honors degree in Economics and a Master of Science degree from the London School of Economics.

This manager was asked “it must be hard to consistently get the calls right? Are you often wrong?” The manager answered “even the cleverest analyst would be happy to correctly anticipate opportunities 65% to 70% of the time. The key to great strategy is the ability to recognize the 30% to 35% of calls which are not working —etc.” Are you sure you want to back that performance?

3. Cash:

The typical fund keeps 7 to 10 per cent of its assets in cash to finance redemptions. That part of the portfolio is a drag on performance when the stock market is hot.

Over long periods it’s inevitable that managed funds will trail the benchmarks by approximately 2 percentage points a year, reflecting their costs. The fee gorging that comes with actively managed funds is a lot to overcome.

And here is one of the two major reasons I prefer property to shares – the volatility.

Property won’t double overnight as shares can, but it won’t halve overnight either!

Sun Tzu said it best in “The Art of War” some 2,000 years before the birth of Christ “The good fighters of old first put themselves beyond the possibility of defeat and then waited for an opportunity of defeating the enemy”

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