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Australia’s fund managers and the super funds that use them have underperformed the sharemarket horribly as the market has recovered this year.
The return of double-digit performance is being reported this morning as a triumph for the industry, but in fact bank CEOs would be clutching their brows. That’s because the ASX itself is becoming a big threat to their growth strategies.
Yesterday we learned from ChantWest that the median "all growth" fund option (100 per cent growth assets) produced a return of 18.5 per cent per cent for the 12 months to the end of November, after fees and taxes. The All Ordinaries index went up 26.9 per cent in the period, before dividends.
For the calendar year to date the median growth fund return was 11.9 per cent. That compares with a 27.3 per cent rise by the All Ordinaries index.
There’s nothing particularly novel about this – investment managers and super funds, on average, almost always underperform the sharemarket after fees because their investments are diversified to reduce risk.
The problem for the major banks is that their entire wealth management strategy is based around persuading consumers of the benefits of financial advice that leads to pooled investment management – either on proprietary platforms or in superannuation master trusts – and charging handsomely for that process.
And the ASX is increasingly and deliberately becoming a direct competitor to the managed fund industry.
The ASX already has a limited range of exchange traded funds (ETFs) and exchange traded commodities (ETCs) that provide a cheap form of pooled investment in industries, sectors, overseas markets and commodities. This is on top of the actively managed listed investment companies (LICs) and property trusts on the ASX.
Ian Irvine, who joined the ASX from AMP and is now head of listed managed investments, has the job of quickly building the range of listed funds available on the exchange.
As well, there are at least two cheap administration platforms for advisers whose clients invest in directly ASX-listed securities and funds rather than unlisted managed funds via adviser platforms. They are Praemium and Iress’s Xplan.
The cost of this package of listed ASX funds – ETFs, LICs, LPTs, managed on the Praemium or Iress software – is a fraction of the cost of the usual financial planners’ system that has three layers of percentage fees: advisers, platform and fund manager. This cost difference is the key reason for the rapid growth of self-managed super funds.
It means the ASX itself is undoubtedly the main challenge to the banks’ strategy of consolidating and dominating wealth management in Australia – it is a cheaper, better performing alternative.
NAB’s bid for AXA is all about building scale in financial advice and putting more portfolios on the Navigator platform that the bank bought when it acquired Aviva in June.
Navigator, and the other platforms used by advisers to administer their clients’ portfolios, charge a steady fee stream of up to 1 per cent for doing very little for the clients apart from manage their investments in various managed funds.
Some of them handle direct share investments as well, but their original purpose was – and still is – to administer a managed fund portfolio and the commissions that flow to financial planners from them.
Thanks to its partnerships with the promoters of ETFs and LICs, as well as Praemium and Iress, the ASX is building a significant threat to the banks’ strategies based on unlisted managed funds and expensive platforms.
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6 Comments
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Julian McLaren wrote:
This article misleads by comparing a portfolio (growth fund) diversified into asset classes other than Australian shares (international shares, property etc.) with the Australian share market index. This error unfortunately reduces the credibility of the argument.
22 Dec 2009 8:16 AM
David Graham wrote:
While I appreciate the thrust of Alan's argument, the selective use of comparative performance data undermines the credibility of his argument. He cites the underperformance of median managed growth funds when compared to the All Ordinaries as proof the fund managers over-charge and under-deliver. Firstly, the median growth fund will inevitably have exposure to international equities, so the comparison with the All Ordinaries is inconsistent. Whether it is a good strategy to have an exposure to international equities is one to be considered by the individual according to his needs and risk appetite. However, as Warren Chant is wont to suggest, one must compare apples with apples. Secondly, his comparison conveniently neglects to mention that for calendar 2008 the All Ordinaries fell by 43.03% compared to the relevant managed fund index return of negative 31.69 per cent (in this case I am using the Morningstar Investment Trust Multi-Sector Aggressive index, but other 'all-growth' indexes will not show very different results). I am sure that we could select and compare results over differing periods ad infinitum to prove our respective points. Nevertheless, it is disappointing when commentators resorting to subjective data ranges and generalisations to support otherwise reasonable analyses.
22 Dec 2009 10:04 AM
Jason Brooks wrote:
Alan, I have been noting with interest your articles over the last year or so that attack the managed funds industry and financial planners. (See ASX's bank ambush, December 22)
Your points are fair enough. Most financial planners just flog product and this should be highlighted to consumers when it occurs.
But I do also think you should highlight hte fact that you own a direct competitive product to both the managed funds industry and financial planners.
You therefore have a conflict of interest. I believe financial journalists, analysts and other financial professionals need to disclose the facts when they have an interest in something they are recommending. Strictly speaking, you would not need to disclose your interest in Eureka when pointing out the failings of the alternatives – but consumers should know where you're coming from.
22 Dec 2009 10:45 AM
Martin Davis wrote:
Not only do they take commissions for doing very little, but the so-called daily managing of the portfolios is virtually non-existent. (See ASX's bank ambush, December 22).
The catch cry is: 'Don't sell now we are in it for the long term'. That's fine if you are in your 30s or 40s, but no help if you are close to or in retirement.
You are much better off managing your own fund – save $15k pa on a $700k portfolio and at least if you lose money you can then only blame yourself.
22 Dec 2009 11:48 AM
Alan Anderson wrote:
To quote Alan Kohler: "Navigator, and the other platforms used by advisers to administer client portfolios, charge a steady fee stream of up to 1 per cent for doing very little for the clients apart from manage their investments in various managed funds". (See ASX's bank ambush, December 22).
A new term. Administer. At last, someone says it as it really is.The last part of the above sentence should be restated as: "Doing very little for the clients apart from 'administer' their investments in various 'administered funds'."
22 Dec 2009 12:44 PM
Steve Blizard wrote:
Alan,
While I agree with your use of Premium and SMSFs (we do heaps of them), and noting there are lots of mediocre fund managers used by banks and industry super funds, the fact remains that a 'growth' fund is not purely an Australian equity fund. (See ASX's bank ambush, December 22).
The cash and property in those funds would drag down the returns regardless. But on the upside, there are a number of managers that have outperformed the index. Not to mention the new actively managed indexes.
22 Dec 2009 8:07 PM
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