Actively Managed Equity Funds Vs Index Style Funds

An index fund is a low cost means of investing into an investment that follows an index for example an Australian Share Index Fund could mimic the ASX 200 All Ordinaries Index.  There are numerous indices and an investment fund for each of these indices is probably available.

There is no qualitative analysis performed to pick which shares are purchased in these funds.  The makeup of the index itself simply determines where funds are invested.

Because of this automation, very low fees are charged.  It is this latter point that index funds usually sell themselves on.  They also argue that many fund managers are not able to consistently do better than their respective index.

We strongly believe, however, that by investing in the index you are:

Investing in not only the good but also the ‘bad and the ugly’.

1. Missing out on the opportunity offered by very accomplished fund managers who can both actively manage your portfolio to improve performance and reduce risk and volatility.
2. Potentially exposing yourself to greater ‘sequencing risk’ which is a phenomenon highlighted recently by the Global Financial Crisis (we will highlight this in our next newsletter).
3. Always going to underperform the index because your return will be the index return less fees.  However, we cannot guarantee that actively managed funds will always outperform the relevant index, as they do not.

Actively managed equity funds generally have higher ongoing management fees and often performance fees when compared to index funds.  However, the table below illustrates the returns provided by an actively managed international share fund we are currently utilising for some clients.  The track record of this fund is far superior even when management fees are taken into account.

The above returns assume that all income is reinvested each year. We remind you that past returns cannot be relied upon to provide a guide to future rates of return.