Direct ownership vs. managed funds
What you'll learn:
- Whether you should pay for a managed fund
- Whether you can do a better job
So far we have just considered the possibility that you, as an individual, buy shares listed on the Australian Stock Exchange. This is called ‘direct ownership’ of shares.
But there’s an alternative. Instead of choosing the shares yourself, you can pay a professional fund manager to do it for you. With as little as $2,000 or so, you can pool your resources with thousands of other investors, with the fund manager deciding what shares to buy. This is called investing in a ‘managed fund’.
Managed funds have some important benefits. First, you don’t need to spend precious time researching which shares to invest in – someone else does all the work. Second, delegating responsibility to a fund manager could mean less stress. If your investing activities cause you to fail the ‘sleep at night’ test, then letting someone else do it might be worthwhile. Finally, and perhaps most importantly, combining your resources with many other people means you can own shares – indirectly – in a wider range of companies. A more diversified portfolio will probably mean less volatility in your investment – a good idea if price fluctuations worry you.
Unfortunately, though, there are also some pretty major drawbacks to investing in managed funds. Studies have shown that many fund managers fail to consistently outperform sharemarket indices such as the All Ordinaries Index. It is telling that many cannot do better than average, even with all the resources they have at their disposal.
Then there are the fees. An ongoing management fee of up to 2% or more is common. Annual long term returns of 8-10% should be expected from investing in the sharemarket, so a fund manager is taking 20-25% of your total return in the form of fees. That’s a pretty big chunk out of your performance. The fees structure of the industry also encourages managers to accumulate funds, not necessarily to produce outstanding results (for a detailed analysis of this issue, read an article from The Intelligent Investor by clicking here).
So what’s the verdict?
Well, if you have limited funds, and little interest in devoting much time to your investments, managed funds are the obvious choice. But for everyone else—and that’s probably you if you’re reading this—you can quite possibly do better than the fund managers (with a bit of homework, of course).
Further Reading
- Watch out for the fee trap. Money Manager makes the above points quite nicely.
