Retreat to managed funds as investors struggle alone

Private investors are turning back to managed funds as markets become more demanding.

Investors are using managed funds to gain access to overseas markets such as Wall Street.

It’s what you might call a confidence crisis — there is now a clear pattern of private investors retreating from self-directed investing and turning once more towards managed funds.

We saw early evidence of this only a few weeks ago with the ­fascinating reversal of trends in do-it-yourself superannuation, as industry funds witnessed net inflows from the SMSF sector for the first time ever.

Now signals of retreat are emerging from another corner of the market. There is a discernible return to managed funds, where private investors pay managers to both choose stocks and carry out the trades.

According to finance house OneVue, at the end of last year DIY fund investors held 28 per cent of their portfolios in managed funds, a substantial lift of 5 per cent on a year earlier. In contrast, holdings in listed shares fell by more or less the same amount — 4.8 per cent to 26 per cent.

Yet remarkably, there is no evidence managed funds have got any better than they were during the post-GFC era when investors fled the sector after being burnt by falling sharemarkets in 2008-2009.

So what has happened?

1. Investors are turning back to managed funds not because they are enthusiastic about the model, but rather in frustration over a sluggish local sharemarket where it is difficult to make good returns. For evidence look no further than the ASX 200, which at the 5000 point mark is more or less where it was a decade ago (only dividends have made returns ­acceptable at about 4.8 per cent a year).

2. The move towards diversifying portfolios beyond the ASX to include overseas markets such as Wall Street has led investors to the safety of big funds rather than the uncharted territory of picking individual stocks on overseas exchanges.

3. Fund managers have improved their internal communications with improved transparency. You can now easily find out which top stocks the fund actually invests in, and you can generally see more information about strategies and tactics.

4. The spectrum of fund offerings has genuinely improved to ­encompass a huge range of ­activities. Where once funds had broadly generic categories such as “US leaders” or “European industrials”, there are now useful niche categories such as ­technology and healthcare. Which all sounds very well, but there are significant failings in the fund management system and they need to be aired — and it’s not just that you are handing over control of your investments to somebody else.

Many fund managers continually fail to match index benchmarks. This is the reason why “dumb” index funds and exchange traded funds (ETFs) have become so popular. It also true some fund managers beat the index — and do so with impressive regularity.

But the truth is ordinary managed funds doing little more than “index hugging”, where they buy the main stocks in a given market, will not beat the index.

To access many managed funds — and ironically some of the best funds — you must go through a platform. In other words, you can’t email them or call them up, you must go through an intermediary such as a financial adviser dealer group, which makes it efficient for the fund manager but costs you more. Paying platform fees before you get to pay fees to the manager itself is one of the greatest weakness in the managed fund system.

In a perfect world, fund managers would spend their days carefully selecting the best stocks — buying them at the best times, selling them when they know it is time to get out. That way, funds would keep trading to a minimum and tax charges to a minimum as well.

In the real world, fund managers never stop trading and getting hit for trading charges and taxes. But often when they report you only get their performance in percentage terms against the market. What you really want to know is how did your money perform? How much did you make after all those fees and taxes are taken out — that figure is always lower, but it’s the one that matters.

The trend towards fund managers seems to be accelerating. A recent survey from consultant Investment Trends on investment intentions says the number of investors intending to use managed funds has doubled from 6 per cent for 2014 to 12 per cent for 2015.

A study from the ATO, an independent source, also shows there is a swing towards managed funds held by investors, although the figures are not quite as convincing — 13.8 per cent in 2012 to 14.5 per cent last year. Either way, the pattern is clear: more investors are finding it all too hard to do it for themselves, you only have to wonder whether they will find the fees from fund managers any easier to take.

Trial Eureka Report FREE for 21 days. Register now at www.eurekareport.com.au