Last time we looked at how good (or more to the point, bad) fund managers are at beating their benchmarks in different countries around the world. For the five year-period ending December 2014, the overall picture was grim, although there were pockets of modestly decent performance — notably by large cap-managers in India and Japan, and by mid- and small-cap managers in Australia.
But investors who are lucky enough to have chosen an outperforming fund can have most, if not all, of any additional value wiped out by fees. Data from the SPIVA scorecard produced by S&P Dow Jones Indices shows a vast discrepancy in the fees charged by actively managed funds in different countries.
In developed markets, the highest fees in that same five-year period were charged in Canada. On average, Canadian investors paid an annual expense ratio of a whopping 2.14%. Europe (including the UK) was not far behind; there investors paid an average of 1.88% a year for domestic equity funds.
Frustratingly for them, investors in both Europe and Canada pay considerably more than investors in the US. The average expense ratio on US large-cap equity funds in that particular period was 0.75%.
In emerging markets, one country stands out by a mile. Chilean investors paid a staggering 4.5% a year on average for domestic equity funds. How Santiago’s fund house executives manage to sleep at night I really don’t know.
As every TEBI reader is aware, passive funds are hugely cheaper than actively managed ones. The SPIVA figures show that in the US, active funds levied about three times as much in fees as passive ones, while in Europe the average active fund charged more than five times as much as the average passive fund. Because the cost of passive funds is falling faster than the cost of active funds, those price differentials have grown and continue to do so.
Of course, the higher the fees a particular fund charges the harder it is for the manager of that fund to deliver net-of-fees performance; and because of compounding, the cumulative impact of fees on net returns is considerable. The SPIVA data shows, for example, that, in the five-year period ending December 2014, a European fund manager would have had to outperform a passive manager, before fees, by 7.36% in order to have comparable after-fees performance. That’s a huge amount of alpha for a manager to generate.
The lesson is simple. The fund industry and the media love to focus on performance; but it’s fees that consumers should be most concerned about. You need to identify a truly extraordinary fund manager, and before he outperforms, to justify the considerable premium you’ll pay to use him instead of a low-cost index fund. Good luck with that — especially if you’re Chilean.