‘Underwhelming’ fund performances hitting investors hard

More than $414 billion of investors’ money is in underperforming managed funds, so it’s critical that Aussies keep their wits about them.

Of 9,300 managed funds in Australia, 78 per cent of those with a 10-year track record have underperformed their respective benchmarks by an average 1.88 per cent, according to research by digital wealth provider, InvestSMART.

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The analysis, based on Morningstar data, found this meant Aussie investors had invested a whopping $414 billion in underperforming funds.

At the same time, they are paying average fees of 1.74 per cent.

Measuring over three years, underperforming funds jump to 80 per cent of the 7,300 funds with three-year track records. These funds underperformed their benchmark indices by an average of 2.0 per cent, while investors paid average fees of 1.67 per cent.

That took total underperforming funds under management (FUM) to $533 billion over three years.

“It is pretty well known in the industry that over the longer term, most fund managers will underperform their benchmark by the cost of their fees. This is largely because a benchmark does not have any transaction costs – it is an hypothetical calculation,” InvestSMART CEO Ron Hodge said.

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“So why are benchmarks important? Benchmarks are a comparison metric, allowing investors to compare apples with apples when they are looking at a number of investment options.”

“For example, there is not much use comparing an International fund to an Australian Equities fund or a property fund with a bond fund,” he added.

He said “underwhelming” funds and their managers will face increasing competition as the growing impacts of technology are felt.

Noting the global fall in fund manager fees over the past decade, he said investors can thank regulatory and technological developments will push prices down further.

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InvestSMART chairman Paul Clitheroe added that there are plenty of low-cost investment products out there, so if you’re paying too high a fee, you’re giving away too much of your share of investment returns.

Active vs passive investment, the scorecard

The latest active versus passive scorecard from S&P, released this month, found nearly 90 per cent of international equity funds and more than 70 per cent of Australian equity general, Australian bond and Australian real estate investment trust (A-REIT) funds underperformed their respective benchmarks on an absolute basis.

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“There is nothing novel about the index versus active debate. It has been a contentious subject for
decades, and there are few strong believers on both sides, with the vast majority of market participants falling somewhere in between,” S&P global managing global research director, Priscilla Luk said.

“Over the years, we have heard passionate arguments from believers in both camps when headline numbers have deviated from their beliefs.”