The Motley Fool

The dangers of investing in managed funds

Over the last few weeks, we Fools have been reporting on the performance of some of the ASX’s most popular and successful managed funds.

In contrast to exchange-traded funds (ETFs) that simply follow a benchmark index like the S&P/ASX 200 Index (ASX: XJO), managed funds aim to deliver market-beating performance through actively picking shares on your behalf. The ASX 200 index holds 200 different companies. But a typical managed fund can hold 100, 50, 20 or even 10 shares in an effort to find winners and ditch losers for outsized returns.

Recently, we’ve covered managed funds offered by Magellan Financial Group Ltd (ASX: MFG) here, Mirrabooka Investments Ltd (ASX: MIR) here and Antipodes Partners here.

All of these funds have delivered some pretty impressive numbers, making a fair case that investing with them is better than just going with an index fund like the Vanguard Australian Shares Index ETF (ASX: VAS).

But I think a warning that some managed funds are more equal than others is pertinent.

The dangers of investing in managed funds

The fact is, most Australian managed funds do not outperform the ASX 200 index over a long period of time. In fact, 9 in 10 Aussie funds underperformed the index last year, according to a report in the Australian Financial Review (AFR). Those aren’t odds I’d like to take a punt on.

In separate reporting in the AFR just this week, the paper looked at the performance of a popular ASX fund in Montgomery Investment Management’s flagship Australian Equities Fund.

According to the report, the Montgomery fund underperformed the S&P/ASX300 Accumulation Index by 1.2% per annum over the five years to 31 May 2020. In other words, you would have been better off just ‘buying the index’ over investing in this fund back in 2015. This fund’s not-inexpensive management fee of 1.36% per annum wouldn’t have helped either, especially when you consider Vanguard’s VAS ETF charges just a fraction of this with a 0.10% per annum fee.

In Montgomery’s defence, the portfolio manager did tell the AFR that its ‘quality-focused, value-orientated’ strategy is a hard one to execute in the current market environment, and investors should expect it to underperform around 3 years in 10. But even so, the risks of investing in these relatively expensive managed funds instead of an index are hard to ignore.

Foolish takeaway

I’m not prepared to totally write off managed funds as a good way to invest in ASX shares just yet, despite the sobering statistics quoted above. Like any investment, you should scrutinise each fund like you would a company. That means assessing its managers and how much skin they have in the game, reading reports and aligning with the fund’s style. In most cases, you will indeed just be better off buying an index fund. But finding that 1-in-10 needle in the haystack can be a lucrative game if you play it properly.

These 3 stocks could be the next big movers in 2020

When investing expert Scott Phillips has a stock tip, it can pay to listen. After all, the flagship Motley Fool Share Advisor newsletter he has run for more than eight years has provided thousands of paying members with stock picks that have doubled, tripled or even more.*

In this FREE STOCK REPORT, Scott just revealed what he believes are the 3 ASX stocks for the post COVID world that investors should buy right now while they still can. These stocks are trading at dirt-cheap prices and Scott thinks these could really go gangbusters as we move into ‘the new normal’.

*Returns as of 6/8/2020

Motley Fool contributor Sebastian Bowen has no position in any of the stocks mentioned. 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.

Related Articles...

Latest posts by Sebastian Bowen (see all)