The dangers of investing in managed funds

Here's why investing in ASX managed funds instead of ETFs can be dangerous and why some funds are more equal than others.

| More on:
Chalk drawing of a risk bag and a reward bag on set of scales

Image source: Getty Images

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

sdf

Over the last few weeks, we Fools have been reporting on the performance of some of the ASX's most popular and successful managed funds.

In contrast to exchange-traded funds (ETFs) that simply follow a benchmark index like the S&P/ASX 200 Index (ASX: XJO), managed funds aim to deliver market-beating performance through actively picking shares on your behalf. The ASX 200 index holds 200 different companies. But a typical managed fund can hold 100, 50, 20 or even 10 shares in an effort to find winners and ditch losers for outsized returns.

Recently, we've covered managed funds offered by Magellan Financial Group Ltd (ASX: MFG) here, Mirrabooka Investments Ltd (ASX: MIR) here and Antipodes Partners here.

All of these funds have delivered some pretty impressive numbers, making a fair case that investing with them is better than just going with an index fund like the Vanguard Australian Shares Index ETF (ASX: VAS).

But I think a warning that some managed funds are more equal than others is pertinent.

The dangers of investing in managed funds

The fact is, most Australian managed funds do not outperform the ASX 200 index over a long period of time. In fact, 9 in 10 Aussie funds underperformed the index last year, according to a report in the Australian Financial Review (AFR). Those aren't odds I'd like to take a punt on.

In separate reporting in the AFR just this week, the paper looked at the performance of a popular ASX fund in Montgomery Investment Management's flagship Australian Equities Fund.

According to the report, the Montgomery fund underperformed the S&P/ASX300 Accumulation Index by 1.2% per annum over the five years to 31 May 2020. In other words, you would have been better off just 'buying the index' over investing in this fund back in 2015. This fund's not-inexpensive management fee of 1.36% per annum wouldn't have helped either, especially when you consider Vanguard's VAS ETF charges just a fraction of this with a 0.10% per annum fee.

In Montgomery's defence, the portfolio manager did tell the AFR that its 'quality-focused, value-orientated' strategy is a hard one to execute in the current market environment, and investors should expect it to underperform around 3 years in 10. But even so, the risks of investing in these relatively expensive managed funds instead of an index are hard to ignore.

Foolish takeaway

I'm not prepared to totally write off managed funds as a good way to invest in ASX shares just yet, despite the sobering statistics quoted above. Like any investment, you should scrutinise each fund like you would a company. That means assessing its managers and how much skin they have in the game, reading reports and aligning with the fund's style. In most cases, you will indeed just be better off buying an index fund. But finding that 1-in-10 needle in the haystack can be a lucrative game if you play it properly.

Motley Fool contributor Sebastian Bowen has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

More on How to invest

A group of young people lined up on a wall are happy looking at their laptops and devices as they invest in the latest trendy stock.
How to invest

3 common investing mistakes with ASX shares (and how to avoid them)

Avoiding these mistakes could protect your capital when investing.

Read more »

Man putting in a coin in a coin jar with piles of coins next to it.
How to invest

How to generate $52,000 of annual passive income starting at $0

The share market is a great place to generate income. Here's how to do it.

Read more »

Man holding fifty Australian Dollar banknote in his hands, symbolising dividends, symbolising dividends.
How to invest

How to build a passive income portfolio with $20,000 and ASX dividend shares

Here's quick guide to generating income from the share market.

Read more »

A woman sits at her computer with her hand to her mouth and a contemplative smile on her face as she reads about the performance of Allkem shares on her computer
How to invest

How to start investing in ASX shares with just $1,000

Starting out can be intimidating but it needn't be.

Read more »

Person handing out $50 notes, symbolising ex-dividend date.
How to invest

How to build a $1,000 a month passive income stream

Here are two strategies for generating a boost to your income.

Read more »

Woman looking at a phone with stock market bars in the background.
How to invest

Can't find ASX shares to buy right now? You're not alone

It's hard to find a good bargain in the markets right now.

Read more »

A little girl fills her jar up with coins with a smile on her face.
How to invest

Harness the power of compounding: 3 tips to turbocharge your ASX share portfolio

Compound interest can change your life if you let it.

Read more »

a smiling picture of legendary US investment guru Warren Buffett.
How to invest

What Warren Buffett would look for in ASX shares

Here's how you could invest like the Oracle of Omaha on the ASX.

Read more »