What the fund managers don’t want you to know

70% of active retail fund managers failed to beat the S&P /ASX 200 Accumulation Index over the five years to June 2012, but charge a fee ten times higher than Vanguard’s Australian Shares Index ETF.

Research by Standard & Poor’s shows that performance was even worse over one year and three years, with more than 70% (1-year) and 80% (3-years) of active fund managers unable to beat the index. According to Morningstar, the average retail investment fee for an actively managed fund tracking the S&P / ASX 200 Index (Index: ^AXJO) (ASX: XJO) was 1.59%, while the listed Vanguard Exchange Traded Fund (ETF) charges a fee of just 0.15%.

And it doesn’t end there. Index funds adopt a buy and hold strategy, only selling out of some stocks on a quarterly basis, as stocks get taken out of the index, resulting in lower transaction costs and less tax on capital gains. Hence the reason why many fund managers will still quote their performance as gross returns before fees and tax.

Unfortunately there’s more bad news with many retail investors also being charged commissions by financial advisers, making it almost impossible for them to beat the index return over sustained periods.

And many of Australia’s fund managers are index huggers. In other words, there is not much difference between their portfolios’ major holdings and the main stocks listed on the index. The big four banks, Telstra Corporation (ASX: TLS), Wesfarmers (ASX: WES), Woolworths (ASX: WOW) and either one or both the big miners, BHP Billiton (ASX: BHP) or Rio Tinto (ASX: RIO) and usually the biggest holdings in fund manager portfolios.

While investment advisors to the fund managers believe that active managers can beat the market, the evidence suggests not, and very few active fund managers will beat the index consistently. The issue is that the investment advisors have a conflict of interest and without active managers would likely not exist. While some cite evidence that small cap active managers have regularly beaten the Small Ords Index, simply avoiding small resources stocks would have delivered the same result over the past few years.

Foolish takeaway

The best thing investors can do is take control of their investments and superannuation. Check the fees that you are being charged, and the performance (after tax and fees) that your managed fund is delivering, compared to the index. If they aren’t beating the index consistently, then you need to consider other options.

Interested in our #1 dividend-paying stock? Discover The Motley Fool’s favourite income idea for 2013-2014 in our brand-new, FREE research report, including a full investment analysis! Simply click here for your FREE copy of “The Motley Fool’s Top Dividend Stock for 2013-2014.”

More reading

Motley Fool writer/analyst Mike King owns shares in Telstra, Woolworths and BHP.

The 5 mining stocks we’re recommending in 2019…

For decades, Australian mining companies have minted money for individual investors like you and me. But if you believe the pundits and talking heads on TV, those days are long gone. Finito! Behind us forever…

We say nothing could be further from the truth. To earn the really massive returns, you’ve got to fish where others aren’t fishing—and the mining sector could be primed for a resurgence. That’s why top Motley Fool analysts just revealed their exciting new research on 5 ASX miners they believe could help you profit in 2019 and beyond…


The best way we see to play the global zinc shortage… Our #1 favourite large-cap miner (hint: it’s not BHP)… one early-stage gold miner we think could hit the motherlode… Plus two more surprising companies you probably haven’t heard of yet!

For free access to our brand-new research, simply click here or the link below. But be warned, this research is available free for a limited time only, and we reserve the right to withdraw it at any time.

Click here for your FREE report!