Why Fund Managers Are a Waste of Money

Become your own fund manager, and build a balanced portfolio adjusted to suit your own attitude to risk.

The Motley Fool

For years, nobody questioned the myth of the fund manager. These superhuman stock pickers won “star” status for their semi-mythical ability to thrash the wider market, making grateful investors rich in the process.

Then the myth started to unravel, as research repeatedly showed that three quarters actually underperformed the market.

Soon investors began to wake up to the fact that the only person making money was the manager themselves, through the lavish fees on their funds.

Well beaten

S&P Dow Jones has published new research confirming that instead of beating the market, the vast majority of managers are beaten by it.

What’s fascinating is the sheer scale of long-term underperformance. Incredibly, fund managers are even worse than we thought they were.

For example, in the 2016 calendar year, an astonishing 87% of UK active equity funds failed to beat the benchmark S&P United Kingdom BMI index.

Last year was particularly bad but by no means unusual, with 74% underperforming over a full decade.

World of woe

It gets worse. Over 10 years, 100% of active emerging markets equity funds failed to beat their benchmark, the S&P/IFCI. That’s right, every single one.

I guess that makes 2016 a relatively good year, when “only” 93.62% underperformed.

It is the same story with actively-managed global equity funds, with more than 88% trailing the S&P Global 1200 in the past year, and more than 98% over 10 years.

Some 77% of actively managed US equity funds trailed the S&P 500 in 2016, rising to almost 98% over 10 years.

There is no respite in Europe, where 80% of active funds underperformed last year, and more than 88% over 10 years.

No wonder global fund manager BlackRock has just announced it is replacing most of its human stock pickers with computers.

Fund charges

Asset management companies claim that the very best fund managers can add value, and it is true that a handful do, but in the longer run the majority do not.

The picture is even worse when you consider that fund managers charge a premium for underperformance with initial fees of up to 5% of your money, and annual management charges ranging from 0.75% to 1.75%.

Manage your own money

Instead of paying extra for failure you can build your own low-cost portfolio using exchange traded funds (ETFs) issued by companies such as BlackRock’s iShares, Vanguard, State Street Global Advisors’ SPDR and Invesco PowerShares, which passively track a chosen index.

These have no initial fees and annual charges ranging from 0.07% to 0.15% (plus dealing fees and stamp duty charges).

Better still, become your own fund manager, and build a balanced portfolio of stocks and shares, adjusted to suit your own attitude to risk.

It takes a little time and effort, you have to understand the risks as well as the rewards, but there is one danger you definitely avoid: handing over a fat chunk of your wealth to an overpaid, underperforming fund manager. There’s a lot of them about.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

More on Investing

Canadian Dollars
Stock Market

Where to Invest $5,000 in April 2024

Do you have some extra cash to spare? Here are five companies to invest $5,000 in next month.

Read more »

Plane on runway, aircraft
Stocks for Beginners

Up 53% From its 52-Week Low, Is Cargojet Stock Still a Buy?

Cargojet (TSX:CJT) stock is up a whopping 53%, nearing closer to 52-week highs from 52-week lows, so what's next for…

Read more »

Question marks in a pile
Bank Stocks

Should You Buy Canadian Western Bank for its 4.8% Dividend Yield?

Down 35% from all-time highs, Canadian Western Bank offers a tasty dividend yield of 4.8%. Is the TSX bank stock…

Read more »

Gold bars
Metals and Mining Stocks

Why Alamos Gold Jumped 7% on Wednesday

Alamos (TSX:AGI) stock and Argonaut Gold (TSX:AR) surged after the companies announced a friendly acquisition for $325 million.

Read more »

tsx today
Stock Market

TSX Today: Why Record-Breaking Rally Could Extend on Thursday, March 28

The main TSX index closed above the 22,000 level for the first time yesterday and remains on track to post…

Read more »

Nuclear power station cooling tower
Metals and Mining Stocks

If You’d Invested $1,000 in Cameco Stock 5 Years Ago, This Is How Much You’d Have Now

Cameco (TSX:CCO) stock still looks undervalued, despite a 258% rally. Can the uranium miner deliver more capital gains to shareholders?

Read more »

Businessman holding tablet and showing a growing virtual hologram of statistics, graph and chart with arrow up on dark background. Stock market. Business growth, planning and strategy concept
Dividend Stocks

TFSA Magic: Earn Enormous Passive Income That the CRA Can’t Touch

If you're seeking out passive income, with zero taxes involved, then get on board with a TFSA and this portfolio…

Read more »

potted green plant grows up in arrow shape
Stocks for Beginners

3 Growth Stocks I’m Buying in April

These three growth stocks are up in the last year, and that is likely to continue on as we keep…

Read more »