Managed funds performance slugged by index hugging and fees
Managed investments and retail superannuation products have underperformed their benchmarks through a combination of index hugging and high management fees with nearly fifteen per cent of funds consistently underperforming for more than five years.
At the same time a reduction of between half and one per cent in management fees would have resulted in 50 per cent of fund managers and superannuation funds beating their chosen benchmark according to a report released by Stockspot.
The Fat Cats Fund Report 2014 found 35 per cent of retail superannuation funds indexed to the S&P/ASX 200 had outperformed that benchmark after fees and only 38 per cent had outperformed the S&P/ASX 300 after fees.
Managed investment funds benchmarked to the S&P/ASX 200 fared even worse with only 22 per cent outperforming that benchmark after fees while 55 per cent outperformed the S&P/ASX 300 after fees.
The report made the assessment after examining managed investment funds and superannuation products that were Australian domiciled and used the ASX 200 and ASX300 as benchmarks and had available data on performance and fees for at least five years.
As a result of this assessment it found that 75 funds or 14.8 per cent of the 506 funds assessed, were ‘Fat Cat Funds' that underperformed those benchmarks by 10 per cent or more over five years. The report did not examine industry funds claiming that performance data for the latter was not readily accessible.
Of the 75 funds named Stockspot said ANZ/OnePath offered 21 funds, followed by MLC and Colonial First State which offered 13 funds each and AMP/AXA which offered eight funds — totalling 42 funds offered from only four providers.
The report said that 89 per cent of these 75 underperforming funds sat on platforms owned either by a bank, AMP or Perpetual and stated "this can be largely explained by the higher fees charged by platforms versus off platform managed investments and superannuation products".
The report stated that managed funds benchmarked to the S&P/ASX 200 had a 32 per cent chance of beating the index with fees lower than 1.25 per cent, while funds indexed to the SP/ASX300 had a 71 per cent chance of beating the benchmark with fees lower than 1.25 per cent.
Super funds benchmarked to the two indexes had a 54 and 58 per cent chance of beating the benchmark with the lower fee figure with Stockspot stating that this was still a "huge reduction in fees required to generate even mediocre performance".
The report did not advocate that investors pull out of funds stating it was not ‘sell list' but rather that funds within it needed further investigation as to why they had not performed well over one, three and five year periods.
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