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Vanguard’s latest newsletter has reported that recent data from the SPIVA Australian Scorecard showed that last year, 76.5% of actively managed funds underperformed against the relevant index. Over the last 15 years, the figure rises to 85.3%
So, given the higher fee structure of managed funds, is there still a place in a portfolio for actively managed funds and do the members of the community have managed funds in their portfolio?
Up0I have used Managed Funds for most of my younger days investing, with some success. I currently have an Australian Equities fund that was performing admirably up to COVID-19 and then contributed extensively to the club of those funds substantially underperforming the market. Even now, it is still 6-7% down from 2020. I also have an Emerging Markets fund that has done OK and is ahead of the median performance.
One of my major gripes is that you don’t hear a thing about the funds when they go down by 40% but are bombarded with stats showing the great performance when they come back up by 25%.
I suspect that active fund management does still have some part to play in today’s portfolios but picking the right managers is much more of a quandary.
Up0Hi Fraser,
It’s an interesting topic you bring up. I think it would really depend on each persons own investment objectives and circumstances.
I know some investors who are happily in the camp of low cost, market rate of return. They usually have a regular dollar cost averaging strategy and typically set and forget.
While there are others who are really hunting that alpha or overperformance above the standard benchmark.
There’s been numerous studies to show that most managers fail to beat the big index’s, particularly after fees. So you’re point is spot on.
The main reasons why beating something like the S&P500 is so hard, is because these index’s are a really high bar in terms of long term performance. Managers then also need to time the market and have a much higher cost base. Typically costing investors 1%+ p.a. for management fees and then typically another 20% on any outperformance if they beat the market. Both these fees eat away at most of the alpha that is generated.
With that said though, there are some very talented investors and firms out there, that can and do consistently outperform. My experience would suggest these are probably more the exception than the rule.
I’d be looking out for an investment strategy that can be executed year after year, particularly in the years of lower or even negative returns. This means that they are outperforming when times are tougher and not just in bull market periods.
Also consider the overlap of their outperformance to your own core strategy too. If the managers holdings mirror a lot of the great performance for the index then you may be doubling up.
Another point to consider too, is that some of these great managers like to keep their FUM small, and often close their funds for new or additional investment when they reach a certain size. This is because it becomes degrees harder to outperform if you are managing larger and larger pots of wealth.
Hope this helps
– Kev
Up0Thanks, Kevin. The bottom line appears to be that if you are investing in the major markets around the world, index funds are hard to beat. If, however, you are looking at smaller or specialist markets, there is a higher chance of success with an active manager- choosing the right one, is more difficult!
Up0Agree with all of Kevin’s points and your conclusions Fraser. Luke Laretive from Seneca financial ( financial planner and fund manager) was intereviewed on Equity Mates about this and has probably done a write up in his free weekly newsletter about what to look for. In summary,
– the fund manager should have a clear philosophy and objectives that align with yours– they should provide and extra benefit, Net of fees, that cannot be provided by an index fund/ETF. e.g. outperformance by >1%, Less volatility/drawdown during down periods, currency hedging. Access to alternative assets/ Private equity
I think one can spend time looking at different managed funds which cover small caps and emerging markets. Can start as a smaller satellite position and add if confident the fund manager communicates well and achieves objectives.
I’ve invest in a couple of active ETFs for the past 2 years that I’m happy with. Will post these later in the new community forum. 1 actively managed small cap LIC which I’m not so happy with
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