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Fool me once, shame on you; fool me twice …

‘Equity funds that outperform today were probably yesterday’s poor performers.’

Increasingly investors are realising that the only variables that can be controlled when investing are the fees that you pay, whereas equity market performance turns out to be pretty random, and certainly unpredictable. Equity funds that outperform today were probably yesterday’s poor performers … and where they’ll land up tomorrow is in the lap of the Gods. Our research leads us to believe that the majority of funds that beat the market do so purely as a result of luck rather than skill. But leaving the arguments of picking funds aside, is there any way to save on fees while maximising returns? The short answer: Yes.

The unit trust general equity sector currently has R282 billion in assets under management (AUM). Of this R262 billion has a three-year track record (in 139 funds).

During this time the market returned 5.07% per annum.

Three-year comparison – Market return: 5.07%

 

Totals

Funds underperforming 

the market

Funds

outperforming

the market

Number of funds

139

118

21

Assets under management

R262bn

R250bn

R12bn

Average total expense ratio

1.34%

1.4%

0.99%

TER paid in rands

R3 693m

R3 592m

R101m

Source: Financial Express Analytics / Profile Media data (30 September 2016 – 30 September 2019)

Let’s assume the numbers in the above table were stable throughout those three years:

  • 85% of available funds underperformed the market
  • 95% of assets under management underperformed the market
  • 97% of fees paid by investors were to underperforming funds

Looking at five-year returns the results are not much different:

Five-year comparison – Market return 5.32%

 

Totals

Funds underperforming

the market

Funds

outperforming

the market

Number of funds

107

92

15

Assets under management

R213bn

R192bn

R21bn

Average TER

1.38%

1.39%

1.32%

TER paid inrRands

R3 116m

R2 740m

R376m

Source: Financial Express Analytics / Profile Media data (30 September 2014 – 30 September 2019) 

  • 86% of available funds underperformed the market
  • 90% of assets under management underperformed the market
  • 88% of fees paid by investors were to underperforming funds

Another way of looking at this is to plot each fund’s total expense ratio (TER) against the three-year return:

From the equation it appears that by paying a higher TER (vertical axis) you can expect to earn a lower return (horizontal axis) and vice versa. By taking the ten funds with the lowest TERS available in the market, we managed to outperform the ten most expensive funds on a three-year basis:

Three-year comparison

Market return 5.07%

10 cheapest funds

10 most expensive funds

Average TER

0.4%

2.2%

Assets under management

R6bn

R17bn

Average 3-year return

4.32%

3.42%

TER in Rands

R24m

R388m

Source: Financial Express Analytics / Profile Media data (30 September 2016 – 30 September 2019)

All ten of cheapest funds were based on some form of indexation or followed a passive approach to investing. Had investors used the cheapest options available, they would’ve earned R153 million (R17 000 * 0.9%) more in performance and/or saved R306 million (R17 000 * [2.2%-0.4%]) in TER alone. Bear in mind that we have focused only on TER’s; if we had worked with Total Investment Charges (TIC) the costs would’ve been even more widely spread: generally speaking, active funds pay more in transaction costs which impacts the TIC’s.

A similar trend can be seen if you look at the data over a five year period:

Five-year comparison 

Market return 5.32%

10 cheapest funds

10 most expensive funds

Average TER

0.45%

2.16%

Assets under management

R5bn

R17bn

Average three-year return

4.33%

4.03%

TER in rands

R22m

R388m

Source: Financial Express Analytics / Profile Media data (30 September 2014 – 30 September 2019)

Are investors getting value for money when 95% of total fund expenses in the general equity space goes to the lower performing funds? And the flip side to this question is if lower priced funds perform better than expensive ones, why are the ten lowest priced funds only holding 2% (three-year data) of the retail assets under management?

Final thought:

‘If you do not change direction, you may end up where you are heading.’

~Lao Tzu

Casparus Treurnicht is a portfolio manager at Gryphon Asset Management

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Fees first, remember fees first!!! Long time back realized how these fees first principle leaves the investor naked in the street.

Nobody knows nuttin’

Rather speak for yourself. Plenty people do very well for themselves. Look around you at the guys driving cars that cost more than your house.

I think the real picture will look even more shocking if the TIC (total investment charge) is taken into account plus advice fees, Specialty if this was done over a 10 year period, 90%+ fund managers would underperform the market. It’s day light robbery, specially because there is no downside to their underperformance. Also remember picking the winning active fund manager year on year is even more difficult.

To answer your question – Casparus- active funds are marketed more (because they have bigger budgets), investors don’t know better and tracking and monitoring of funds is not reported and transparently communicated adequately. But there is a slow shift to passive, but so many years of Active investing means passive is still way behind. It is changing.. albeit slowly.

Therefore, Investors ..look at a passive/indexed approach where you buy the market at low costs.
Some of the asset managers include – Satrix, Sygnia 10X. There is further potential for the costs to come down to 0.05%. that’s the future I want to see sooner.

How does it cost 3,693,000,000 to run 139 general equity unit trusts??????

Easy – advisors and gatekeepers follow the hottest active fund of last year

“From the equation it appears that by paying a higher TER (vertical axis) you can expect to earn a lower return (horizontal axis) and vice versa“

Morningstar found the same

INVOICE!

That will solve the problem. Give investors the gross return, and then invoice them monthly through unit reduction your fee. Make it visible, then you will see what happens.

Come on ASSISA, show some balls and change the regulations.

the fund managers need their Ferarris and mansions etc. How would they do that without those exorbitant fees?
Dont be blinded by those small numbers quoted as percentage when fees are involved. It adds up and YOU pay it

Worth looking at Spiva data how passives outperform actives in so many countries and investment sectors
https://us.spindices.com/spiva/#/

In SA, one wonders whether people invested in pension or providend funds will not eventually sue their trustees for dereliction of duty for selecting active funds with a 10% chance of beating passives over 10 years, and at a guaranteed higher cost. One can only foresee one outcome from such a court case…the reasonable person would say…?

By way of example, on the SA Multi Asset High Equity Sector (i.e.where pension fund money invested) there are 143 funds with 5 year track records

PASSIVES
Sygnia Skeleton Balanced comes in at 19th place
Satrix Balanced is at 25 th

ACTIVES
Foord Balanced 113th
Stanlib Balanced 118 th
Absa Balanced 117 th
Sanlam Private Wealth 82nd
Ashburton Balanced 83rd
PSG Blanced 84th
Old Mutual 66th
Coronation Balanced Plus 63rd
Prudential Balanced 44th

http://www.fundsdata.co.za/scripts/home/QuickRank.aspx?c=South%20African–Multi%20Asset–High%20Equity&period=5yr&load=1

You will find that ranking 1 to 18 are mostly active funds. Umbrella pension funds should do better than what the tools indicate.

When investing for yourself you need to consider carefully the investment platform you use:

1. Apart from the star performing ETF’s are there income funds that outperform ETF’s.
2. Are there star performing managed funds that perform similarly to or better than ETF’s.
3. What is the customer service like when switching and managing your accounts.

For now I’m sticking with my managed platform.

Gryphon Flexible Fund is hanging around 5th…and respectable performance over any whichever period you choose

Fund Managers need to advertise on Moneyweb aggressively if they don’t want to take this continued bashing from Moneyweb.

The truth not setting you free?

I don’t bother with Unit Trusts and Fund Managers. I do my own thing.

Fund Managers : (apologies to Churchill) never before have so many paid so much to so few for so little output

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