We are forever mindful of our duty to identify and secure real value for our clients when managing their financial positions. Our evolution to becoming totally independent financial advisers, has been in large motivated by our long term scepticism of fund managers, their products and the lack of any value-add to the client. In fact, more times than not the client is better off without them.
Most recent data released by S&P Dow Jones indicates that three-quarters of all actively managed investment funds focusing on the top 200 Australian stocks underperformed cheaper ‘passive investment’ index funds over the past five years. Managers of the international equities fared even worst with 86% under performing the index.This data is totally consistent with independent research performed over a range of markets and time frames.
The reasons for such consistent failure to outperform the index by fund managers is mostly due to the fact that these markets are saturated by the same traders sharing the same knowledge about the same shares. In other words it’s a “zero sum game”. Most buying and selling of company shares on a day-to-day basis is performed between fund managers, who are therefore the market makers,with their gains being generated by the fees and transaction costs associated with these trades. Most of the fund managers under performance can be directly attributed to these transaction costs and their fees.
In reality, it is not the fund managers that under perform, they collect fees. It’s their clients that under perform as they pay the fees!
There are however exceptions, where specialist fund managers can add consistent and real value in identifying and managing certain shares.
This mainly happens in the markets which are not so commonly understood or traded. Globally this is often a fact in the emerging markets and economies. There are opportunities for well resourced and skilled managers to find real value ahead of their competitors. As you can imagine the risk factors are also significantly increased as the level of speculation and uncertainty rises. Further volatility is created by currency fluctuation.
One market sector of particular interest to us which can be appropriate for some of our client financial requirements, is the Australian smaller stock asset class, also known as small-cap and micro-cap. There are more opportunities for skilled, specialist fund mangers to find real value in this sector of developing companies. In fact 83% of the fund managers focusing in this market sector have outperformed the passive index over the past five years.
From our point of view, we apply a sceptical analysis to any financial offering before making a recommendation to our clients. Our principal objective continues to be delivering sustainable financial outcomes at the lowest level of risk appropriate to each client.