Management fees
Management fees are the costs charged by fund managers and portfolio managers.
A Fund manager is someone who looks after the investments in a trust, like an ETF or Managed Investment Trust. They work within the bounds of the PDS. A Portfolio manager is someone who works on behalf of their clients, a task often completed by financial advisors, where they decide what funds or shares you should buy.
Research consistently shows that most professional fund managers underperform the market after fees. There are of course exceptions to this like the Medallion fund, but there are very few exceptions.
Fund manager performance reality
Extensive research across multiple decades and markets consistently shows that active fund management fails to deliver superior returns after fees.
Under 25% of actively managed funds outperform their benchmark index over 10+ year periodsOnly 30% of top-quartile fund managers maintain top-quartile performance in their subsequent funds. Effectively meaning that i's random change and not skill that generates superior returns. They are likg fortune tellers looking at statistical tea leave trying to predict the future. It's hard and then when it's obvious it's obvious for everyone, so the market reacts and the price has changed before you have time to capitalise on the knowledge.
ETFs: Low-Cost Market Access
Exchange-Traded Funds (ETFs) offer investors low-cost access to broad market indices, providing diversification and market returns without the high fees and underperformance risks of active management.
ETF benefits include:
- Low fees: Management fees as low as 0.07% annually
- Broad diversification: Instant exposure to hundreds or thousands of securities
- Transparency: Holdings are disclosed daily
- Liquidity: Trade throughout the day like stocks
- Tax efficiency: Lower turnover reduces capital gains distributions
Cost Comparison Example
| Investment Type | Annual Fee | 20-Year Value |
|---|---|---|
| Active Fund | 1.5% | $320,000 |
| Index ETF | 0.1% | $450,000 |
| Difference | 1.4% | $130,000 |
$100,000 investment, 7% annual market return
Index Availability by Asset Class
Different asset classes have varying levels of index availability and efficiency. Understanding this helps determine when to use index funds versus active management.
Index Investing Recommendations
| Asset Class | Index Availability | Typical ETF Fee |
|---|---|---|
| Cash | Excellent | 0.05-0.15% |
| Bonds | Excellent | 0.07-0.20% |
| Australian Shares | Excellent | 0.07-0.15% |
| International Shares | Excellent | 0.10-0.25% |
| Credit | Poor | NA |
| Residential Real Estate | Poor | NA |
| Commercial Real Estate | Good | 0.20-0.40% |
| Commodities | Good | 0.25-0.50% |
When Management Makes Sense
While index investing is generally superior, there are specific situations where active management or alternative strategies may be justified.
Asset Classes Without Broad Indices
- Credit Markets: Not every company needs to borrow, so there's no comprehensive credit index
- Alternative Investments: Private equity, hedge funds, and other alternatives often require active management
- Residential Real Estate:There is no index for residential real estate, so you need to manage it yourself.
When your strategy requires it
- But you are time poor or need help: This could be something like a value investing strategy, a momentum investing strategy, or a specific sector strategy.
Even in these situations, carefully evaluate whether the potential benefits justify the higher fees and complexity. Most investors are better served by sticking to low-cost index funds for the majority of their portfolio.
Self Managed provide members with simply stratgy options to consider, market insights to help you implement your strategy as seamlessly as possible, to help you avoid paying 1% management fees then they don't give you a net benefit.
FAQ
Active management faces several challenges: market efficiency makes it hard to find mispriced securities, high fees erode returns, transaction costs add up, and even professionals are subject to behavioral biases.
For most investors and most asset classes, yes. ETFs provide broad diversification at low cost. However, there may be specific situations where active management is justified, such as in asset classes without broad indices.
Not necessarily. Focus on avoiding high-fee funds that don't provide clear value. If you choose active management, ensure the fees are reasonable and the strategy is appropriate for your goals.
Aim for total portfolio fees under 0.2% annually. This is achievable with a well-constructed index fund portfolio.
Rebalance gradually - implement changes over time if needed. Monitor and maintain by rebalancing annually, not more frequently.
Read the PDS (Product Disclosure Statement). The PDS will detail all fees and charges associated with the fund.