Managed funds letting us down

Index Funds might be a better bet

Around 70% of active retail funds underperformed the index over the past year, three years and the past five years. That’s according to a report by S & P Dow Jones Indices.

Given the S&P / ASX 200 Accumulation index return (which includes dividends) over the one and five year periods have been negative, makes the situation even worse.

Should we all give up and shovel our funds into cash?

That’s probably not a good idea. In fact you could equal the index by investing in an index fund – and certainly at a fraction of the fees most actively managed funds charge. Even of those funds that beat the index, you would still have to pay the fund managers fees, making it even more difficult to surpass the market return. Combined, that really stacks the odds against an individual investor who tries to beat the market with managed funds.

There was one bright spot amongst the gloom. Close to 80% of the funds in the small cap  sector have beaten the index over five years. Companies in the small cap sector are those included in the ASX 300 index, but not in the top 100. Among the companies in that sector are several companies that are fairly well known, including Limited (ASX: CRZ), Cardno Limited (ASX: CDD), Aristocrat Leisure (ASX: ALL) and IOOF Holdings (ASX: IFL).

International equity funds, Bond funds and A-REIT funds also disappointed, with close to 90% of the international funds failing to beat the index over the past year. The news yet again shows the advantages of a passive index fund, versus an actively managed fund.

As the report quotes William F. Sharpe, “Should you index at least some of your portfolio? This is up to you. I only suggest that you consider the option. In the long run, this boring approach can give you more time for more interesting activities such as music, art, literature, sports, and so on. And it very well may leave you with more money as well.”

We here at the Motley Fool have long argued that investing at least a portion of your portfolio in index funds makes sense for those who don’t have the time or inclination to find and select a managed fund.

It doesn’t make sense to pay expensive management fees to a fund manager or financial advisor, unless they are going to perform. Sadly, it seems, the odds of finding one that consistently outperforms the market are stacked against you.

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Motley Fool writer/analyst Mike King doesn’t own shares in any company mentioned. The Motley Fool’s purpose is to help the world invest, better. Take Stock is The Motley Fool’s free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead. Click here now to request your free subscription, whilst it’s still available. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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