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Losing your money, for a fee
By Scott Francis |
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PORTFOLIO POINT: Performance data shows that managed funds failed to protect investors from the market downturn. |
Fancy paying tax on an investment that's lost money, or, worse still, handing over fees to the people who lost the money for you? Welcome to our annual review of managed funds. And just in case you think that at least managed funds could protect you when the market got tough, think again: about three out of four funds failed to match the market average even though that market average return was a portfolio-crushing -16.01% (based on the ASX 300 accumulation index). The funds in this year's survey are the same as last year's (see Big-name funds disappoint). They are funds are managed by the biggest (and therefore best-resourced fund managers), are 'large company' Australian share funds with a five-year performance history at the time when we first looked at this sample of managed funds. The performance data comes from either the fund manager's own website, or the Morningstar data base. The results show that, on average, managed funds underperformed the average market return over the 12 months to the end of July 2008. This shows that as a group the professional fund managers involved have not protected investors from the market downturn. Over the longer term, the results are actually worse, with the average managed fund underperforming the market return by an average of 3.11% a year over the five years to July 31, 2008.
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nAustralian sharemarket index and managed fund performances |
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| Returns to July 31, 2008 |
One year |
Five years |
| ASX300 Index Return (accumulation) |
-16.01% |
14.39% |
| AMP Limited |
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| AMP Equity Fund |
-13.60% |
14.10% |
| AMP Blue Chip Fund |
-12.80% |
14.20% |
| Australia And New Zealand Banking Group Limited |
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| ING Blue Chip Imputation Trust |
-17.32% |
11.69% |
| AXA Asia Pacific Holdings Limited |
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| AXA Equity Imputation Fund |
-16.91% |
-13.99% |
| AXA Australian Equity Growth Fund |
-15.40% |
14.40% |
| Challenger Financial Services Group Limited |
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| Challenger Australian Share Fund |
-24.23% |
11.62% |
| Commonwealth Bank Of Australia |
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| Colonial Australian Share Fund |
-18.50% |
11.35% |
| Colonial Imputation Fund |
-18.80% |
10.88% |
| Macquarie Bank Limited |
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| Macquarie Leaders Imputation Trust |
-13.70% |
13.93% |
| Macquarie Active Australian Equity Trust |
-15.48% |
13.70% |
| National Australia Bank Limited |
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| MLC Vanguard Australian Shares Index |
-16.50% |
12.80% |
| MLC Australian Share Fund |
-17.10% |
11.80% |
| Perpetual Limited |
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| Perpetual Industrial Share Fund |
-24.10% |
8.70% |
| St George Bank Limited |
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| Advance Imputation Fund |
-12.41% |
10.72% |
| Advance Sharemarket Fund |
-14.05% |
11.66% |
| Suncorp-Metway Limited |
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| Suncorp Australian Shares Fund |
-20.07% |
13.22% |
| Westpac Banking Corporation |
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| BT Australian Share Fund |
-13.80% |
14.98% |
| BT Imputation Fund |
-14.29% |
17.32% |
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| Average Return |
-16.61% |
11.28% |
| Average Underperformance |
-0.60% |
-3.11% |
The Morningstar database contains 201 "large blend" Australian share managed funds with five years of performance data to the end of July 2008. Of these, 54 beat the average market return (-16.01% average annual return), meaning that the other 147 underperformed.
Over one year to July 31, 135 funds of a sample of 312 beat the average market return (-16.01%); meaning that the other 177 underperformed this average market return.
A divided story of income
The problem of managed funds distributing high levels of capital gains from trading remains critical. For example, the AXA Australian Equity Growth fund had a distribution of 12.6% and the BT Australian Share fund had a distribution of 10.74%, and these funds were not alone in having double-digit distributions. The reality is that the income from the sharemarket averaged about 4% for the year; a distribution of more than double that implies a high level of realised capital gains, and the tax inefficiency that comes with that. No doubt it is unpleasant for investors in these funds to see their investments go backwards in value, while at the same time having to pay a capital gains tax bill.
There was a second group of funds that showed distributions that I had not expected: extremely low levels of income. For example, the Suncorp Australian Share Fund had a distribution of 1.58% and the BT Imputation Fund 1.83%. On the positive side, at least there would not be much tax paid on such a distribution; indeed, you would expect such a low level of distributed income to include mainly fully franked income. Investors might have expected an income of at least the market average return of 4%; however once a fund manager fee of up to 2% was taken out of the income, very little was left. It demonstrates another way in which managed funds can distort income.
Conclusion
There is certainly a place for managed investments in an investment portfolio. For beginner investors they provide immediate diversification and the ability to contribute small amounts of money on a regular basis to build a financial position (for example, $200 a month). They also provide access to asset classes that are difficult for individual investors to reach directly, such as global shares, private equity or emerging markets.
There remains, however, a lack of overall evidence as to their efficiency in delivering the sort of returns investors would expect, particularly when it comes to "active" Australian share funds. Clearly investors who invest in an "active" managed fund do so because they expect the fund to beat the average market return. However, results do not show that this expectation is met. Further, the lack of transparency and tax-ineffectivness around income and capital gain distributions work against the investors in many funds.
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