Billions in underperforming funds: InvestSMART
Written by Eliot Hastie, this article discussed InvestSMART's media release "$414bn of Australia’s hard earned cash is invested in underperforming funds: InvestSMART research". The following article appeared in Investor Daily on September 25, 2018.
Digital wealth provider InvestSMART has found that some of the country’s biggest fund managers are charging fees for no or underwhelming performance.
InvestSMART modelling of Morningstart data has found over $410 billion is invested in underperforming funds after analysing 9,000 funds.
Out of 5,297 funds that had operated for a decade, 28 per cent had underperformed their benchmark indices by an average of 1.88 per cent with fees at 1.74 per cent.
InvestSmart chief executive Ron Hodge said fees were an important part of any equation.
“It is pretty well known in the industry that, over the longer term, most fund managers will underperform their benchmark by the cost of their fees. This is largely because a benchmark does not have any transaction costs,” he said.
Mr Hodge said benchmarks were a hypothetical calculation, but they were an important metric to use.
“Benchmarks are a comparison metric, allowing investors to compare apples with apples when they are looking at a number of investment options,” he said.
Gradually, technology innovation was levelling the field for investors and would have an impact on fund manager fees, said Mr Hodge.
“Fund manager fees have fallen globally over the past decade and we believe advances in technology, along with regulatory change, will continue to put pressure on traditional fee models,” he said.
Frequently Asked Questions about this Article…
InvestSMART's research found that over $410 billion is invested in underperforming funds in Australia. Their analysis of 9,000 funds showed that 28% of funds operating for a decade underperformed their benchmark indices by an average of 1.88%, with fees averaging 1.74%.
Fund manager fees are crucial because they can significantly impact the overall performance of an investment. As InvestSMART's CEO Ron Hodge noted, most fund managers tend to underperform their benchmarks by the cost of their fees, making it essential for investors to be aware of these costs.
Benchmarks serve as a comparison metric, allowing investors to compare different investment options on a like-for-like basis. They help investors understand how a fund is performing relative to a standard, which is crucial for making informed investment decisions.
According to InvestSMART, technology is gradually leveling the playing field for investors by putting pressure on traditional fee models. Advances in technology, along with regulatory changes, are expected to continue driving down fund manager fees globally.
Fund manager fees have fallen globally over the past decade. This trend is expected to continue as technology and regulatory changes exert further pressure on traditional fee structures.
The 1.88% underperformance figure represents the average extent to which 28% of funds, operating for a decade, lagged behind their benchmark indices. This highlights the importance of considering both performance and fees when evaluating investment options.
A fund might underperform its benchmark due to the costs associated with managing the fund, such as transaction fees and management fees. Benchmarks do not incur these costs, which can lead to a performance gap.
Regulatory changes can impact fund manager fees by increasing transparency and competition, which may lead to lower fees. As noted by InvestSMART, these changes, along with technological advancements, are expected to continue putting pressure on traditional fee models.
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