Various financial news wires including Fairfax and News Corp (ASX: NWS) are reporting that the latest survey by leading asset management consultants Mercer shows that the vast majority of long only Australian asset managers failed to beat the S&P / ASX200 accumulation index in 2018 that includes the beneficial effects of dividends.
It’s been reported that the median loss for a long only fund was 6.7% compared to 2.7% for the accumulation index in another embarrassing result for Australia’s fee-charging active funds management industry.
It’s also been reported that the median ‘long short’ fund lost 4.3% for the year which suggests they were also soundly beaten by the index and I’m assuming all these performance figures are net of fees. If not the results would be even worse.
Notably, reporting or marketing performance figures net of fees is still not a compulsory requirement in Australia as far as I’m aware which speaks of the regulatory environment here given it has been compulsory in other developed markets like the US and UK for at least 15 years.
So what’s an investor to do?
The results offer a few key takeaways for retail or mum and dad investors the main one of course being that unless you have a high degree of confidence a manager has the stock-picking skill to beat the market after fees you’re better off putting your money into a low-fee index fund or zero fee exchange traded fund that tracks the market. Or investing yourself, more on that below.
Of course some managers do beat the market over 3, 5 or 10-year time horizons, but investors need to be aware that a lot do not and are a waste of money.
Another point is that fee pressure will continue to hit the active funds management industry with the likes of Wilson Asset Management Ltd (ASX: WAM), Janus Henderson Group (ASX: JHG), Magellan Financial Group Ltd (ASX: MFG), Macquarie Group Ltd (ASX: MQG), Platinum Asset Management Limited (ASX: PTM) and Perpetual Limited (ASX: PPT) all vulnerable to this headwind to different extents.
Over 2017 the earnings multiples of asset managers globally and in Australia were slashed by investors in response to the rise of passive investing 0ffered by the likes of Vanguard and its taking of market share from active asset managers.
In response to the regulatory restrictions on ‘hedge funds’ that could get away with offering a 2% and 20% fee structure to their “professional investor” clients, many large asset managers started offering ‘long short’ funds to retail investors with slightly higher fees than long only funds. The twist or regulatory get out being that they could only take ‘short positions” to “hedge risk” or for “portfolio position management”, rather than to speculate as a hedge fund could do on behalf of its sophisticated or non retail investors.
In other words, many of what Mercer flags as “long short” funds are not hedge funds in that they’re forbidden by their investment management agreements and constitutions from taking speculative positions.
For example a ‘long short” fund manager available to retail investors can sell call options on a stock if market appreciation suggests it could become too large a part of a portfolio to breach its investment mandate on position sizing. Or it could sell put options to protect on downside risk, however, ‘naked’ short selling would not be allowed in the traditional sense of a hedge fund speculator.
Retail investors then should be aware that ‘long short’ or hedge funds come in different forms and fees, so it’s worth reading the investment management and product disclosure statements (PDS) prior to deciding how much value managers are bringing to the table in return for fees charged.
It’s also notable that most of the mid or large cap managers in Australia are competing in a a limited market dominated by the Big 4 banks and the likes of BHP Billiton Limited (ASX: BHP) and CSL Limited (ASX: CSL).
As such their performance is never likely to vary far from the index with them likely to under or outperform depending on their exposure to the big 4 banks in particular.
Every Australian who doesn’t run an SMSF will already have plenty of exposure to the big banks via their industry or other default superannuation funds and as such investing more of their savings into a fee-charging large cap fund also investing in the banks doesn’t make sense.
An index fund would at least offer lower fees, but again you’d not be getting equity market exposure much different to your super, which is probably already a significant amount of your net savings outside property.
As a practical example let’s assume you have $200,000 in savings to invest and you shop around to buy an active fund charging a relatively low 1% per annum management fee.
That would cost you $2,000 per year, plus the buy / sell spreads (additional costs) when you trade in or out of the funds.
Compare that to managing your own portfolio where (like the asset manager) you take a buy-to-hold approach which means you shouldn’t need to place more than 12 trades a year at a cost of $15 per trade or $180. That’s a near $2,o00 saving per year, before you consider the fact that most active managers can’t even beat the market.
As such I’d suggest learning to invest privately as it’s not rocket science and the playing field has been levelled like never before by the rise of the internet and its information overload that gives private investors access to the same info as professional investors if they want it.
Professional small-cap investors do have a significant advantage over retail investors in being able to access management teams more easily, therefore it might be worth seeking out the best small-cap manager to manage some cash. Moreover, if you’re not a highly-experienced investor I’d suggest avoiding the small-cap minefield end of the market as it’s not known as the ‘casino’ for nothing.
However, if you’re focused on the more conservative Australian mid-to-large-cap end of the market I’d suggest learning to invest yourself or index investing to save a lot of money.
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The Motley Fool Australia owns shares of Platinum Investment Management Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.