Large v small cap may be better metric than index v active
AustralianSuper recently provided details about its decision 12 months ago to build an internal investment management team rather than use external fund managers. AustralianSuper hired 23 staff including investment managers, trading staff, analysts and operational specialists for this.
The first investments to be taken over by the investment management team included Australian equities, direct property and infrastructure investments. The aim of the exercise was to cut the costs that come with using external fund managers.
Mark Delaney, AustralianSuper's deputy chief executive and chief investment officer, said: "There are a number of significant benefits to this project, primarily a cost reduction of up to 15 basis points. The amount of savings will grow as the fund grows."
This idea of reducing investment costs is one of the reasons people set up SMSFs. They are thus able to make direct investments in shares and property, and have a greater sense of control over their super investments. Moreover, this set-up can result in decreased costs and greater confidence in the performance of their fund.
There is a long-standing debate as to whether active fund managers add value compared with an investment in index funds. Active fund managers are meant to use their investment expertise and market inefficiencies to pick stocks that will outperform the market. An index fund buys all the shares that make up an index. An example of this is Vanguard's Index Australian Shares Fund, which is made up of the top 300 ASX-listed companies.
Active fund managers have higher management costs than do index funds.
A sad fact of the investment industry is that there are fund managers who say they are active managers when in fact they are not. In these cases many investment decisions are made because of changes in an index, not because of a change in the investment worthiness of a company.
A report that S&P released this week provides some valuable information to help investors make up their own mind. The report, titled S&P Indices Versus Active Australia Midyear 2013, details how well active fund managers compared with the index in several investment categories. The indices included the S&P/ASX 200 Index and the S&P/ASX Small Ordinaries Index.
The comparisons between active managers and the indices were done over periods of one year, three years and five years. The scorecard for active fund managers operating in the top 200 Australian shares index showed that 74 per cent of them outperformed the index over the past 12 months, but for the three- and five-year periods the index outperformed more than 60 per cent of active fund managers.
When it came to the managers investing in the small companies, a very different picture emerged. In this situation the index was outperformed by 94 per cent of active fund managers over a 12-month period, and by 88 per cent over a three-year period and 82 per cent over a five-year period.
The conclusion from these results is that individuals and SMSF trustees investing in large-cap stocks should seriously consider allocating some of their investment portfolio to index funds.
In addition they should closely assess whether the fund managers they are using are active managers, or are benchmark huggers who make many decisions due to changes in an index and therefore are not adding any value.
Max Newnham is the founder of smsfsurvivalcentre.com.au
Frequently Asked Questions about this Article…
AustralianSuper recently announced their decision to build an internal investment management team instead of using external fund managers. This move aims to reduce costs and improve control over investments.
AustralianSuper's internal investment management team aims to reduce costs by up to 15 basis points, which can lead to significant savings as the fund grows. This approach helps in cutting down the expenses associated with using external fund managers.
The internal investment team at AustralianSuper is expected to reduce costs by up to 15 basis points, with savings growing as the fund grows. This cost reduction can benefit investors by potentially increasing their returns.
Investors often choose SMSFs to reduce investment costs and gain more control over their investments. This setup allows them to make direct investments in shares and property, potentially leading to decreased costs and increased confidence in their fund's performance.
Investors often prefer SMSFs because they allow for direct investments in shares and property, offering greater control over their super investments and potentially reducing costs.
Active fund managers use their expertise to pick stocks they believe will outperform the market, whereas index funds buy all the shares that make up an index, like the Vanguard Index Australian Shares Fund, which includes the top 300 ASX-listed companies.
The debate centers around whether active fund managers, who pick stocks to outperform the market, add more value compared to index funds, which simply track a market index. Active managers typically have higher costs.
Yes, active fund managers typically have higher management costs compared to index funds. This is due to the active management and research involved in selecting stocks that aim to outperform the market.
According to a report, 74% of active fund managers outperformed the top 200 Australian shares index over the past 12 months. However, over three and five years, the index outperformed more than 60% of active managers.
The S&P report showed that while 74% of active fund managers outperformed the top 200 Australian shares index over the past 12 months, the index outperformed more than 60% of active managers over three- and five-year periods. In contrast, active managers investing in small companies consistently outperformed the index.
Active managers investing in small-cap stocks significantly outperformed the index, with 94% outperforming over a 12-month period, 88% over three years, and 82% over five years.
Yes, the article suggests that individuals and SMSF trustees investing in large-cap stocks should consider allocating some of their portfolio to index funds, as they have shown to outperform many active managers over longer periods.
Yes, the results suggest that individuals and SMSF trustees investing in large-cap stocks should consider allocating some of their portfolio to index funds, as they have shown to outperform many active managers over longer periods.
A 'benchmark hugger' refers to fund managers who claim to be active but make investment decisions based on index changes rather than the investment worthiness of companies. These managers may not add significant value to the investment.
Investors should assess whether their fund managers are genuinely active or if they are 'benchmark huggers' who make decisions based on index changes, which may not add value to their investments.
Investors should closely assess their fund managers' strategies and performance to determine if they are genuinely active managers or merely following index changes. This involves reviewing their investment decisions and the value they add to the portfolio.
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