Investing in managed funds isn't as popular on the ASX as it used to be. However, despite the rise of rival products, mainly exchange-traded funds (ETFs), managed funds are still a popular avenue for Australian passive investors.
If you weren't aware, a managed fund is an unlisted investment. Unlike a share, ETF, or listed investment company (LIC), an investor doesn't typically buy shares or units of a managed fund on the ASX. Instead, they buy and sell units directly from the fund manager itself. The assets themselves are held in a trust and are managed on behalf of the owners by the fund manager. Because of this structure, managed funds tend to charge higher fees than other passive investment vehicles.
One can find managed funds to invest in almost anything one can think of. In Australia, there are managed funds that cover international shares, bonds, infrastructure, cryptocurrencies, precious metals, real estate, and, of course, ASX shares themselves.
I've observed the performance of the top managed funds in Australia for many years and have even invested in a few of them. I wish I knew a very important thing when I did make that first investment.
The events of last week involving Bennelong Funds Management brought this back to the front of my attention. Bennelong was one of the ASX's most successful fund managers for many years, attracting large sums of funds under management. However, its performance has had a couple of rough years. When this happens, it often results in an exodus of funds, placing even more pressure on its managers. You can ask the folks over at Magellan Financial Group Ltd (ASX: MFG) all about that. This week, it was revealed that Bennelong has been sold to Antipodes Partners.
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Managed funds and ETFs on the ASX
Over my years of observing funds like Bennelong, I have noticed a pattern. The ASX always has a fund manager of the moment. A manager that hits impressive performance figures for a few years, drawing plenty of attention and extra dollars. Investors wonder how they did it, and whether they should invest. Years ago, it was Magellan and Bennelong. Today, it could be the high-flyers at L1 Group Ltd (ASX: L1G).
This can last for one, three, or even five years. However, what I have observed over a long period of time is that very few fund managers enjoy more than a year or two in the sun. Most simply cannot match or beat the index over long periods of time, especially enough to offset the fees that they charge.
I wish I knew this when I first started investing in ASX shares. If I did, I would have put more money in ultra-cheap index funds, like the Vanguard Australian Shares Index ETF (ASX: VAS) or the iShares S&P 500 ETF (ASX: IVV). These funds charge minuscule management fees, and yet tend to beat out the managed funds that play in the same space that they do. There are exceptions. But finding those is a hard business. And there's never a guarantee that past performance continues into the future.
As such, I think the vast majority of ASX investors would be better off sticking to these kinds of funds than experimenting with managed funds, LICs, or actively managed ETFs.
