Keeping your eyes wide open to fund manager window dressing

Due to the fancy footwork deployed by some fund managers, their financial results can't always be accepted at face value, and as an investor you need to be aware of what tricks they use to embellish their performance.
By · 27 Jan 2021
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27 Jan 2021 · 5 min read
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Whether you're invested in index funds or active fund managers - that charge higher fees in an attempt to beat the index - here are some of the common stunts they often pull to make their performance look better than it really is.

Quoting performance before fees

While any clear comparison should reveal returns ‘after of fees’, some professional managers only report ‘gross results’, which means all fees are yet to be taken out.

This can lead to all manner of sneaky tricks.

For example: a fund that does not deduct the management fee before calculating the performance fee. Given that a management fee can have a significant bearing on a fund manager’s entitlement to a performance fee, it must be subtracted before this calculation is made.

Similarly, some fund managers qualify for performances fee by sneakily calculating and paying it quarterly, as opposed to annually - under which calculation such a fee may not necessarily be payable. If your fund is paying itself performance fees quarterly, check to see if its practising what referred to as ‘portfolio pumping’ to artificially boost the value of their existing position at exactly the right time fees are payable.

Inappropriate benchmarks

The beauty of an index fund is that it can replicate the performance of a benchmark very closely on an after-fees basis. For example, if a fund is tracking the top 200 stocks on the ASX, its benchmark will be the S&P ASX 200 Total Return Index.

While that appears to be a no-brainer, active fund managers that favour stock selection over index-hugging, may choose an unrelated benchmark that enhances its stock selection outcomes.

The trouble with bad benchmarks is they can stray from a fund’s strategic investment universe. Beyond being an inappropriate comparison, the trouble with investing outside a benchmark is that

A) the investments start to become riskier than you realised,

B) the fund is no longer what’s called being ‘true to label’, and

C) outperformance might be easier than it should be.

While some funds claim to be what’s known as ‘benchmark unaware’ – allowing them to invest where they will – this doesn’t necessarily make the strategy any less risky.

Bottom line is, while it’s appropriate to measure any investment strategy against the investment universe it represents, all too often the chosen benchmarks are not ‘apples-to-apples’ comparisons.

It’s equally important to note that Australian funds are not required to give investors a full account of what assets they hold. The reluctance by some fund managers to do so, coupled with their dismal track-record as stock-pickers – with 89% of domestic funds having been beaten by their respective benchmarks - only encourages them to use unrelated benchmarks that flatter their performance.

Benchmark index conveniently excludes dividends

One of the most common tricks used by fund managers is to exclude dividends from their benchmark. If you’re in any doubt what difference dividends can make to a result, compare the All Ordinaries Index to the Ordinaries Accumulation Index.

For example, for the year ending 30 June 2017 a fund wanting to overstate its performance would have compared itself to the ASX All Ordinaries Index which delivered 8.5%, as oppose to the All Ordinaries Accumulation Index - which inclusive of dividends - returned 13.1%. This near enough to 5% difference can be the difference between a fund manager reaching their ‘highwater mark’ (the level at which performance fees begin) and not.

The highwater mark is a huge factor in your overall total returns as it governs when performance fees start. C   onsidering performance fees can be as high as 20% of every dollar made the highwater mark level is a trick we must watch out for. To put this another way, for every dollar of performance above the highwater mark it is ‘taxed’ at 20%.

Compares total returns

Unsure of how well your fund is performing and whether it plays tricks? Why not go to and see how its total return compare against its peers, and its benchmark (inclusive of fees).

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