Managed funds underperform despite lowered fees
The average managed fund fee has declined by a third over the past 10 years, however new analysis from InvestSMART suggests this has not necessarily translated to them outperforming their benchmark.
Evaluating over 4,000 managed funds, including ETFs, between October 2014 and October 2024, InvestSMART found fees are down 32 per cent over the past decade across all benchmarks on Morningstar’s database.
While the average fee stood at 1.54 per cent per annum in 2014, this has lowered to 1.04 per cent as at 31 October 2024.
The research highlighted significant fee reductions across all managed funds of all asset classes and sectors. The largest reductions were observed in diversified funds (conservative to high growth), with the average fee slipping to 1.02 per cent from 1.67 per cent, marking a 39 per cent reduction.
Meanwhile, MSCI World ex-Australia fund fees dropped to 1.13 per cent from 1.82 per cent, declining by 38 per cent.
ASX 200 funds saw fees fall by 33 per cent, standing at 1.13 per cent in 2024 from 1.7 per cent a decade prior.
Looking more broadly at Morningstar’s target allocation indexes, the analysis found aggressive/high growth funds saw the largest fee reductions (44 per cent), followed by conservative (43 per cent), balanced (40 per cent), growth (34 per cent), and finally moderate (32 per cent).
Ron Hodge, chief executive of InvestSMART group, said it was “encouraging” to see fees decline significantly over the last 10 years, driven by the rise of broad-based index tracking ETFs, increased competition, and regulatory reforms.
“However, many funds still charge high fees while failing to deliver on performance for investors,” Hodge observed.
According to the analysis, over half (68.1 per cent) of funds underperformed the index that they track by an average of 0.71 per cent in the 10 years to 31 October 2024.
Of the funds that track the Morningstar diversified fund indexes, just one third (30.6 per cent) managed to outperform their index over that same 10-year period.
“Investing is one area in life where paying more often means getting less in return. Psychologically, we’re wired to think the more expensive something is, the better it is. This is not the case when it comes to investing,” Hodge said.
“Investors must understand that fees, not returns, play the most critical role in compounding their wealth over time. The longer you invest, the more those fees impact your portfolio’s growth.”
Earlier this month, a new Morningstar report titled, The Predictive Power of Fees: Why Managed Fund Fees are so Important, explored the power of fees on fund performance.
A test was conducted by grouping similar funds and splitting them into fee quintiles, and concentrating on core asset classes selected by Australian investors. Then it assessed the relationship between the average total returns and average fees across the quintiles of these categories for the five years ended June 2024. Finally, Morningstar calculated a success ratio which indicated the percentage of share classes that outperformed their Morningstar category peers.
Across most sectors, the research house found the cheapest quintile achieved a higher success ratio than the most expensive fee quintile. For example, in the global large-cap equity group, the cheapest quintile recorded a success ratio of 60 per cent, while the priciest option recorded 23 per cent.
A similar trend was seen in the Australian large-cap equity group (55 per cent versus 20 per cent).
AUTHOR
Rhea Nath
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