The stats are in and it’s not pretty for Australian long-only equity funds.

And that’s before deducting fees for management and performance, according to a report in the Australian Financial Review.

Only seven funds out of 105 managed to produce a positive gain, according to Mercer Investment Surveys. That’s probably not all that surprising given the S&P ASX 300 Index fell by 6.8% over the same period.

When you have billions and billions of dollars to invest in such a small market as Australia, it’s very likely that investment performance is not going to be all that far away from what the market achieves.

What is damning about the fund’s performance is that the median performance of all those 105 funds was -6.9%, which is lower than the index.

What this means is that more than half of those funds failed to beat the index and clearly illustrates that many funds are “index huggers”. In other words, they mostly hold stocks that make up the majority of the index, with the only difference being the proportion of those stocks within their funds compared to the index.

As an example, if BHP Billiton Limited (ASX: BHP) makes up 14% of the index, a fund manager may invest 10% of the fund in BHP, if it believes that BHP is going to underperform the market. BHP may make up more than 14% of the fund, if the manager believes BHP will out-perform the market.

Example performance and holdings

Perpetual Limited’s (ASX: PPT) Australian Share Fund performance for the last 12 months is down 4%. On top of that you have a management fee of 1.95%, an entry fee of up to 4%, plus a buy/sell spread of 0.3%. And that’s all before tax. The fund’s top holdings are:

Those 10 companies account for a large chunk of the S&P/ASX 300 Index, which doesn’t really leave much room for the fund manager to outperform the benchmark.

Foolish take-away

With yet more evidence that active fund managers fail to beat the index most of the time, as well as charging high management fees, we here at the Motley Fool argue that many investors should be invested in an index fund, rather than actively managed funds.  Even better, with a little help from us, individual investors should be able to outperform the market without those fees.

As my Motley Fool colleague, Scott Phillips wrote in this article, “Why pay for someone else to do worse than you can do yourself?

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Motley Fool contributor Mike King doesn’t own shares in any of the companies mentioned. The Motley Fool’s purpose is to educate, amuse and enrich investors. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson. Click here to be enlightened by The Motley Fool’s disclosure policy

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