Weak or average investment performance is often viewed by investors as an anomaly that they have to put up with temporarily until a market or managed fund gets back on track.
Holding out for improved returns is also likely to be tolerated in view of the local sharemarket edging higher (approaching a five-year high) on top of the global financial crisis fading into history.
There is however another dampener on returns — fees — which has been highlighted in recently published research.
Data published in the inaugural “Fat Cat Funds Report” has exposed the managed investment products and superannuation funds that have performed badly compared to the relevant benchmark over a reasonable period, and have done so consistently, but that are also typically charging investors higher fees for the privilege.
Put together by online investment adviser and fund manager Stockspot, the report has identified 75 “fat cat” funds — poor performers that have been singled out as not doing so well mainly because of the fees they charge. The report found that 89% of these were sitting on platforms owned by the big four banks, Perpetual or AMP.
The Fat Cat list is well populated with big bank platforms in the S&P/ASX 200 sphere, which the report said showed an average annual fee of 2.21%, representing 30.8% of the total benchmark return. “This means that for every $1 of returns generated by the market, 30¢ was paid to these fund managers,” the report said. “This average fee is also 46% higher than the average fund in this category.”
“Funds and platforms have remained largely unaccountable for poor performance and high fees,” the report said. “Similar to the findings of the Grattan Institute’s April 2014 report, our research suggests that fees would need to fall between 28% and 32% for just half of super fund managers to beat their benchmark.” It said the huge reduction in fees would even be necessary in order to generate mediocre performance.
Download the entire Fat Cat paper here for free (scroll down to the end of the webpage). For the Grattan Institute report “Super Sting”, which found that Australians are paying fees of up to three times more than they should for superannuation, click here.