An index of success
Sun Herald
Sunday July 12, 2009
A new study shows only the best will beat tracker funds. HERE'S one way to stir your fund manager because your super has shrunk: just mention two words index funds.That's what a study for the Australian Prudential Regulation Authority (APRA) did, and fund managers are livid.In one blow, years of controversy ended with its finding that index funds, which don't do anything other than match a benchmark such as the All Ordinaries stock for stock, will on average do better than active (as in not passive) managers.No wonder that's gone down badly in fundland. Talk about relevance deprivation.In fact, APRA's working paper says "the cost of active investing" is 0.9 per cent a year, which is entirely due to fees. This isn't chicken feed. Over 40 years, with a 5 per cent real return a year, that adds up to 22 per cent less super.Still, it's hardly a revelation that good fund managers beat the index and average ones don't, as any number of surveys have shown.But that's only half of what the study says, though interestingly APRA has been at no pains to elaborate. Some fund managers (and I mean the companies, not the people) just get it right across the board. If a shares fund is good, for instance, that company's bonds or international equities fund will be, too.That'll throw the cat among the pigeons. Forget diversifying between managers; a good one will do just fine. It also suggests that sometimes you really can judge an investment on its past performance, since the top fund managers are likely to stay there for several years. Mind you, the worst have little chance of ever coming good.If you think this all just sounds like common sense, then you haven't spoken to a fund manager lately.So which are the good ones?Sorry, folks, we have to wait for the next instalment in a couple of months. Meanwhile, I wonder how active an active manager should be. Not in trading but thinking. Some stick so closely to the benchmark they're trying to beat that they're really high-fee index funds.In which case, what's the point of them?
© 2009 Sun Herald
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