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3 ways you can invest better than a fund manager

There’s a cohort of Australians earning a lot of money that work in the investment management world.

These people are professional investors who spend their entire time thinking about businesses, doing research, meeting management and so on. They have distinct advantages over regular investors because of how much time they can pour over each stock idea, how much information they have access to and the powerful investment models they can utilise.

But it’s not impossible to outperform fund managers, particularly when you factor in the fees.

Here are three ways you can achieve better returns than a fund manager:

Smaller shares

It’s a lot easier for regular investors to invest in smaller shares. Some investment managers don’t even have the investment mandate to invest in shares outside of the ASX 200 or ASX 300.

If a fund manager has a fund of $250 million, a 5% position equates to $12.5 million – this might be rule out businesses that are worth say $125 million or less because the fund manager doesn’t want to own 10% or more of the company.

Liquidity is an important factor when entering and exiting a position so that it doesn’t push the share price up or down too much.

Being able to get in early on the growth journeys of shares like Jumbo Interactive Ltd (ASX: JIN) and Altium Limited (ASX: ALU) could mean unlocking much bigger returns.

Trade Less

Most fund managers would like to say they are long-term investors but in reality many of them trade more than you’d hope. That’s okay, that’s their choice to do that. But we can’t control what they do.

What we can control is how much we trade ourselves. Each transaction means brokerage costs and a capital gains tax event, so it’s best to minimise these as much as possible.

We have the option of holding shares as long as we want to and allocating as much or as little of our portfolio to that share as we want to.

Invest in an index fund

Perhaps the most obvious way to beat a fund manager is just to invest in an index funds. It’s quite hard for investors to beat the average market return. Then add fees of say 1% per annum and it makes it even harder.

Compare that to the fees of iShares S&P 500 ETF (ASX: IVV) which only cost 0.04% per annum and the fund managers have an almost 1% per annum disadvantage before things even get started.

Foolish takeaway

There are some fund managers out there that I think are very good performers like WAM Microcap Limited (ASX: WMI) and MFF Capital Investments Ltd (ASX: MFF). But there are plenty of others that aren’t so good.

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Tristan Harrison owns shares of Altium, Magellan Flagship Fund Ltd, and WAM MICRO FPO. The Motley Fool Australia's parent company Motley Fool Holdings Inc. owns shares of and recommends Jumbo Interactive Limited. The Motley Fool Australia owns shares of Altium. The Motley Fool Australia has recommended Jumbo Interactive 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.

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