Fund managers charging fees for underperformance
Written by Eliot Hastie, the article quotes InvestSMARTs media release "$414bn of Australia’s hard earned cash is invested in underperforming funds: InvestSMART research". The following article appeared in the Independent Financial Adviser on September 25, 2018.
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…
When a fund underperforms its benchmark, it means that the fund's returns are lower than the returns of a standard index or metric it is compared against. This is important for investors as benchmarks help in comparing the performance of different investment options.
Fund manager fees are crucial because they can significantly impact the overall returns of an investment. Over time, high fees can lead to underperformance relative to benchmarks, as they eat into the profits that investors could otherwise earn.
Benchmarks serve as a comparison tool, allowing investors to evaluate the performance of a fund against a standard metric. This helps in making informed decisions by comparing 'apples with apples' when assessing various investment options.
Technology is gradually leveling the playing field for investors by reducing costs and increasing transparency. It is also putting pressure on traditional fund manager fee models, potentially leading to lower fees and better investment options for everyday investors.
Yes, fund manager fees have fallen globally over the past decade. This trend is expected to continue due to technological advancements and regulatory changes, which are driving down costs and increasing competition.
According to InvestSMART research, 28 percent of funds that operated for a decade have underperformed their benchmark indices by an average of 1.88 percent.
Transaction costs can negatively impact fund performance because they add to the expenses that a fund incurs. Unlike benchmarks, which are hypothetical and do not include transaction costs, actual funds must account for these expenses, which can lead to underperformance.
The average fee charged by underperforming funds, as noted in the article, is 1.74 percent. These fees can contribute to the funds' underperformance relative to their benchmarks.
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