When I told a new client about the statistics about the performance of managed funds, she didn’t believe me.
She, like so many others, have been in funds for ages (both in her super fund and also in her own personal name). Sure, she’d seen years of negatives in amongst the good years, but she’d never even questioned whether they had been as good as the market itself.
So, here are the facts.
According to the latest SPIVA scorecard (that’s the one put out by Standard and Poors where they track performance of the Index versus Active managers), over 60% of managed funds performed worse than the ASX 200 Index.
The same scorecard showed that less than 12% of International managed funds did better than the MSCI Ex Australia Index.
The annual fees on a managed fund (called the MER) are between 0.7% and 2%. The more active the fund is, the more you can expect to pay. Many funds also charge a performance fee.
In light of those facts, if you were to ask me “Should I be in managed funds?”, you’d expect the answer to be a big, resounding “NO”.
But that’s not always the case.
They do have their benefits.
If you’re just starting out, or you don’t yet have the capital to get diversity through buying 10 different individual shares, then a managed fund helps get around the risk issues of only having a small number of different shares.
They also often have the option of a savings plan – without the expense of brokerage every time – if you want to top up your investments.
But the biggest place, in my opinion, to use a managed fund is in a market where you don’t have the specialised knowledge of that market.
I’m good at large cap Australian shares (think top 200 stocks), really good.
But I don’t have the time to watch all of the small, emerging companies in the market, so if I think that small companies are going to go well (usually in a bull market when risk tolerance is higher) then I’ll use a manager that knows those companies really well.
I also don’t want to sit up all night watching individual companies around the globe. So if I’m investing in international equities, then I’d rather leave it to a manager that at least has their people in the right time zone.
So maybe, if a part of the market is doing really well, and even underperforming in that market is still providing a great return, then outperformance isn’t such an issue.
For portfolios over $100,000 though in Australian shares? I’ll stick with direct holdings, thanks very much.