9 out of 10 ASX fund managers underperformed the index last year

According to S&P Dow Jones Indices, 9 out of 10 ASX fund managers underperformed the index last year, the AFR has reported.

The ASX funds classified as “general” investors, which aim to beat the S&P/ASX 200 Index, saw 87% of those funds fail to beat the market in 2018. In the previous year 59% of the funds underperformed the index, still worse than half.

According to the reported stats, the average general Aussie share fund declined by 5.8% after fees, compared to the ASX 200 Index’s decline of 2.8% (before fees).

The late Jack Bogle makes a great point about this. If everyone is investing across the market, then as a whole they are achieving the average, so you may as well just go for the lowest fees to achieve the market average, therefore choosing BetaShares Australia 200 ETF (ASX: A200) or Vanguard Australian Share ETF (ASX: VAS) could yield better results.

Fees are only worth paying to managers if they outperform, but a one-year time period may be a bit too short to judge all managers by. Around three years is the generally-accepted smallest amount of time to properly judge results. The underperformance of general ASX funds was around 50% over three years compared to the index. But, less outperformed the index over five years and even less after ten years.

Why was 2018 rough for fund managers? Most of them usually avoid resource businesses, certainly holding less compared to the index weighting. Resource shares had a strong year compared to the rest of the market and that likely helped the ASX index do even better than normal against the ASX fund managers.

Foolish takeaway

Ultimately, for me, it matters most how the fund manager does over the long-term and how good your returns from the point you bought into the fund compared to the index’s return.

If you can pick funds that outperform after fees, then I think they’re worth holding. One of the ones I like for my portfolio is WAM Microcap Limited (ASX: WMI) because it targets the smallest shares on the ASX.

Another way to beat the index is by picking quality ASX shares like these and not pay any fees yourself in the process.

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Motley Fool contributor Tristan Harrison owns shares of WAM MICRO FPO. The Motley Fool Australia has no position in any of the stocks mentioned. 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.

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