Should I invest in the fund or the fund manager?
I asked myself this question as I was considering whether or not I should use the services of one of the listed fund managers to achieve a specific overseas exposure.
I decided to investigate further and what I found was quite interesting!
It turns out some of the best performing stocks over the past five years have actually been Aussie fund managers. Clearly, they have been doing something right!
In order to get a better overview, I looked at the five largest pure-play fund managers on the market and compared their sharemarket returns to their flagship fund returns as well as to their best-performing fund.
But first, it is important to understand how a fund manager makes money. There are two main ways – the first is through management fees. This is typically between 1%-2% per year of the funds under management. The manager will receive this fee no matter what the performance of the underlying fund is. Clearly, the more funds under management, the higher the management fee income will be.
The second way is through performance fees. All funds are measured against a particular benchmark and fund managers will receive a performance fee of anywhere between 15%-25% of any outperformance compared to that benchmark. Clearly, a strong performing fund manager will make substantially more money through performance fees compared to a poor performing manager.
After looking at each manager here is a summary of what I found:
1. Magellan Financial Group Ltd (ASX: MFG) has been the best performing fund manager and has returned more than 77% each year on average over the last five years. Magellan's flagship Global Fund (which has also been its best performing fund), in comparison, has returned 21.1% per year over the last five years. While Magellan stock has far outperformed any of its actual funds, the strong performance of the Global Fund over a long period has been the driver for strong fund inflows that has allowed Magellan to prosper. It now has around $40 billion in funds under management (FUM).
2. Platinum Asset Management Limited (ASX: PTM) has returned on average 17% each year over the last five years which is significantly better than its flagship International Fund which has delivered returns of 12.3% per annum in the same time. Platinum performed relatively well during the GFC and has built a strong reputation for international investing with $28 billion in FUM.
3. Henderson Group plc (ASX: HGG) is a UK-based fund manager listed on the ASX and has returned on average 30.7% each year over the last five years. While the group does not have a particular standout fund, its best performing fund available to Australian investors over the last five years has returned just 6.9% per year. As Henderson reports its earnings in British Pounds, Australian equity investors have benefited from the weakening of the Australian dollar against the pound. The group now has GBP 81.5 billion in FUM.
4. BT Investment Management Ltd (ASX: BTT) has delivered returns of nearly 41% over each of the last five years on average. This compares favourably against the BT Australian Share Fund which has delivered 7.2% each year during that time. BT's main international fund in comparison has delivered returns of 15.7%. Clearly, investing in the shares would have delivered far superior returns to investing in any of BT's retail funds. The company has $78.4 billion in FUM.
5. Perpetual Limited (ASX: PPT) was the final manager I looked at and has delivered shareholder returns of 13% each year on average over the last five years. During the same period its flagship Australian Share Fund delivered returns of 6.77% per year. Its Global Share Fund performed considerably better delivering returns of 13.5% per year over the last five years. Perpetual has $28.4 billion in FUM.
Foolish takeaway
There is little doubt that investors would have been far better off investing in the fund manager rather than the fund itself in nearly every situation. That doesn't mean you should never get a professional manager to invest your money, it just means that you can benefit from their success as well.
