Fees

doubleJackD

After a bit of google research it appears that the high fees associated with actively managed funds are just not worth it. I just wondered what everyone else thought?

jimjames

I think it depends entirely on the fund and the objectives. Some markets/themes cannot be run successfully as trackers whereas others such as USA are difficult for active funds to beat the market ie beat a tracker fund

Glen_Clark

What a lot of people don't seem to realise is that, for example;
a 2% fee sounds very reasonable until you consider;
1) Its 2% of everything, not 2% of earnings, irrespective of whether any earnings are made - indeed even if a loss is made they still want 2% of your capital
2) This is the real killer. Its 2% of everything every year. So on a 40 year investment like a pension, your fund manager would be getting a lot more of your money, not just the earnings but the capital as well, than you are - even if his bad management has caused you fund to make a loss!

Linton

As Jimjames says it all depends on what you want to invest in. In some areas there is no alternative to managed funds and in some others the alternatives have performed remarkably badly. In many areas there is a wide choice of non-managed funds which consistently provide mid-range returns - they wont be disastrous compared to most others but they wont perform spectacularly well.

For example if you want a general pure equity UK, US, or Global investment focused on large companies then a non-managed fund could well be appropriate. On the other hand if you wanted to invest in small companies, an area which is believed by some commentators to provide a better return than the overall market you really need a managed fund. Another area to consider is income funds - eg if you were a pensioner and wanted a reasonably steady income from a fund then the answer is probably a managed fund.

The relative advantages of managed and passive funds is one for vigorous and repeated discussion.

Basically I would say that first you should decide what you want your fund to invest in and then decide the most appropriate vehicle for that area.

jimjames

I'd also add that the fees are only one element and that in many cases you can get them reduced via a discount broker who will refund the 0.5% annual commission your IFA would have got.

If the managed fund makes 10% more than a tracker per year then paying 1% extra annual fee is still worthwhile. The real killers are expensive tracker funds with TER at or above 1% when the best trackers are 0.1%. When it is a tracker why should one cost 10x more when they are doing EXACTLY the same thing.

gadgetmind

jimjames wrote: »

If the managed fund makes 10% more than a tracker per year

Some do, some don't, and the ones that do one year aren't necessarily those that will do it the next year.

The real killers are expensive tracker funds with TER at or above 1% when the best trackers are 0.1%.

Agreed. I use a heavy core of low-fee Vanguard trackers that cover different geographic areas and cap sizes, and to this have added my own choice of bond ETFs, infrastructure funds and REITs. I also have 5% for "themes", which are whatever I want them to be!

DA63147

Research shows on average tracker funds and actively managed funds, once all the fees are taken into account, historically trackers have performed better than actively managed funds:)

Jegersmart

I would only very rarely use tracker funds myself as they are dumb and follow the market *but* after heavy sell offs and crashes they could be worth considering in the right application.

I do start to rotate into low-volatility funds when market reaches and fails at tops to protect my capital, how are you going to do that having bought some trackers and now sitting back and congratulating yourself on your 0.4% TER?

I am not saying that trackers do not have their time and place - especially *time* - but to say that active funds are not worth it generally speaking is just extremely naive.....at best.

But, whatever you choose I wish you luck!

J

gadgetmind

Jegersmart wrote: »

how are you going to do that having bought some trackers and now sitting back and congratulating yourself on your 0.4% TER?

I'm not. But neither do I think you can call tops and bottoms other than in the rear view mirror.

to say that active funds are not worth it generally speaking is just extremely naive

As the evidence very strongly suggests that active funds aren't worth the extra fees, and those that are can't be predicted in advance, then it's hardly naive. If you do have peer-reviewed studies that show otherwise, then I'd be happy to take a look at them.

dunstonh

As the evidence very strongly suggests that active funds aren't worth the extra fees

That is not correct.

The "evidence" points to managed funds on the whole not being consistent. However, that is always likely to be the case as many managed funds have a strategy that will work well in one bit of the economic cycle but not another or have a higher or lower risk profile than the tracker. It you use managed funds you need to be prepared to move in and out of them. If you are a lazy investor then you ought to be avoided them.

doubleJackD

dunstonh wrote: »

That is not correct.

The "evidence" points to managed funds on the whole not being consistent. However, that is always likely to be the case as many managed funds have a strategy that will work well in one bit of the economic cycle but not another or have a higher or lower risk profile than the tracker. It you use managed funds you need to be prepared to move in and out of them. If you are a lazy investor then you ought to be avoided them.

from my understanding of the evidence it does seem clear that active funds are not worth the fees.

do you have any evidence that shows the average investor can time the economic cycle? from my viewpoint it seems that if the entire financial community failed to forecast the entire eurozone debt crisis it's unlikely that an amateur investor will be able to time the markets.