Most fund managers don't beat their benchmark index
Most funds aim to track and/or outperform a “benchmark” index. For example, an Australian equities fund may be benchmarked against the S&P/ASX200 index. The reality is, a majority of fund managers don't beat their benchmark index, and here’s two reasons why:
- Fees - Fees and the brokerage costs associated with active management reduce returns. So, a fund manger doesn't just need to beat their index, they need to beat their index plus these fees and costs. A managed fund for example benchmarked against the ASX 200, cannot simply invest in each of the 200 stocks comprising the ASX 200, because to do so would guarantee they under-perform the index by the sum of their transaction costs and management fees. Therefore, a fund manager can only beat their benchmark index, if they can find the winners within the index and keep transactions at a minimum.
- Finding the winners - The internet has made the sharing of information across the globe instantaneous. Fund managers, who pick up a trend early, can outperform for a short period of time, until other fund managers follow suit and bid-up the price of the security to a level that is no longer considered to be good value. Securities within an index that are outperforming the overall index, such as a small cap company, are closely watched. In larger capitalised stocks or liquid securities such as commodities, it is even harder to find underpriced securities because nearly all fund managers around the world will be watching. If fund managers are not picking up trends on qualitative analysis, then the new breed of high-speed trading systems will pounce on anything underpriced due to quantitative metrics. It's almost impossible to continually pick the winners, and if you do, they're unlikely to be winners for long.
Logically, and mathematically, it is near impossible for a fund manager to outperform their benchmark index consistently over time. So why pay higher fees for actively managed funds when you can simply invest in a low cost index fund such as the InvestSMART Diversified Portfolios?
These portfolios are made up of index funds or ETFs (exchange traded funds). The portfolios invest in a range of asset classes that have been matched to risk profiles, meaning investors can access global diversified portfolios that are matched to their own risk profile, for instance "Conservative", “Balanced”, "Growth" or "High Growth".
Australia and Asia have been slow in catching onto index funds or ETFs. In the U.S. (as of June 2014) exchange-traded products (ETPs) accounted for more than 70% of global assets while Asia contributed just 7%, according to a BlackRock ETP Landscape report. However a Price Waterhouse Coopers report, released in January 2015, predicts global assets held in ETFs will almost double from US$2.6 trillion in August 2014 to US$5 trillion by 2020, and Asia is expected to “contribute significantly” to this outcome.
Click here to find out more about the InvestSMART Diversified Portfolios.
Frequently Asked Questions about this Article…
Most fund managers struggle to outperform their benchmark index due to fees and brokerage costs, which reduce returns. Additionally, finding consistently winning investments is challenging because trends are quickly picked up by other managers, driving up prices.
Fees and brokerage costs associated with active management reduce the returns of a fund. This means that a fund manager must not only beat the index but also cover these additional costs to truly outperform.
The rapid sharing of information and the presence of high-speed trading systems make it difficult for fund managers to consistently identify undervalued stocks. Once a trend is identified, prices are quickly bid up, reducing the opportunity for sustained outperformance.
Investors might prefer low-cost index funds because they offer a way to match market returns without the higher fees associated with active management. Index funds like the InvestSMART Diversified Portfolios provide diversified exposure at a lower cost.
The InvestSMART Diversified Portfolios offer global diversification across various asset classes, matched to different risk profiles such as Conservative, Balanced, Growth, or High Growth, providing a tailored investment approach at a lower cost.
While the U.S. has embraced exchange-traded products, accounting for over 70% of global assets, Asia has been slower to adopt, contributing just 7%. However, growth in ETF assets is expected to increase significantly in Asia by 2020.
According to a Price Waterhouse Coopers report, global assets in ETFs are expected to nearly double from US$2.6 trillion in August 2014 to US$5 trillion by 2020, with significant contributions from Asia.
Risk profiles in the InvestSMART Diversified Portfolios help tailor investments to individual investor needs, offering options like Conservative, Balanced, Growth, or High Growth to align with personal risk tolerance and investment goals.
Call 1300 880 160
Start a chat
Schedule a call
