There’s no easy way of saying this: I’ve been naughty. Very naughty. For almost 5 years now, I have been investing in actively managed mutual funds. I know, I know, I can hear your protests: some 90% of actively managed funds fail to meet their benchmark targets.
The Horror! The Horror!
When I started investing five years ago, I didn’t know much about money. So I did what most people do: I took professional advice from an independent financial adviser. My FA is a great guy, a childhood friend from school, and a respectable professional. I trust his advice, but I am finally realizing that the system is broken.
In order to hold the investment I have to pay an adviser and a bond fee:
- My investment bond has an annual management charge of 1%
- I pay a 1% adviser fee per deposit (usually once every 3 months)
- I pay a 0.5% adviser fee per year for ongoing management
The bond paperwork also mentions an administration charge on each investment. I may even be charged to make withdrawals. I don’t know because I haven’t done so yet. Additionally, as it is a tax-deferred bond I am accruing a tax liability.
Actively Managed Funds
Actively managed funds are expensive. In my documentation I can find a myriad of fees and charges. To my understanding I appear to be paying at least the following:
- An Annual Management Charge on each fund of 0.75% on average
- An Ongoing Cost of Fund (estimated) of 0.83% on average
- Some of the funds have a 5% upfront “welcome” charge
I had hoped to pull together the various funds in my investment bond, review their performance, and compare it against an S&P 500 tracker fund. I expected this exercise to take me a few hours. Boy, was I wrong! So far I have spent several days wringing my hands together, getting more and more frustrated and confused.
You see, simply tracking the returns of some actively managed funds is fiendishly complicated. Although I record the fund prices and my investment value monthly, many of these funds still manage to muddy the waters. Since I began investing:
- some of my funds have changed ownership
- all of the funds have “unbundled” their pricing, leading to unit recalculations which mean I now require conversion factors to interpret price changes over time
- annual management fees have changed or are now charged in a different way
- for some funds I am charged a certain fee then refunded some of that money later
- a couple of funds have even changed names
Franklin US Opportunities: An Example
The following example is one of the best performing funds in my portfolio. Franklin US Opportunities has turned 1 British Pound into 2.10 British Pounds since 2012. If I consider that performance in US dollars, using the actual exchange rates from 2012 and 2016, the fund has turned $1.57 into $2.60. But as a fund 96% invested in the US market the Dollar-Pound exchange rate should have little effect right? Maybe….I don’t know, and I am totally confused. When the Pound dips in value shouldn’t the American-based investments then increase in value?
Using the dollar figures the fund appears to have returned a CAGR (Compound Annual Growth Rate) of 12.4% every year since 2012, which if true is excellent. Over the same period the S&P 500 returned only 11.36% CAGR. Yet are my numbers net of fees? Perhaps partially? Completely? And what about the effect of inflation, do I use US or UK data?
Step 1 of Investors Anonymous Is to Admit Blame
This is my investing mea culpa. Why did I invest in actively managed funds? Because five years ago I knew a lot less about money than I know now. Not that I’m an expert: five years from now I really need to have learned exponentially more about investing. But call me stupid, call me ignorant, and call me gullible and you may be right on all three charges: I thought I could outperform the market. The good news is that I am finally beginning to see the light. And the light doesn’t say ‘Actively Managed Funds’!
So, What Now?
My FA believes I should sell all my funds and reinvest into 6 ‘fund of funds’. This will add an extra layer of fees. His explanation for this move – and i’m paraphrasing so I may get this wrong – is that these super-funds can move in and out of funds faster so despite the extra fees I should see improved performance.
However I want to sell all my actively managed funds and reinvest in a couple of passive tracker funds. I know that passive funds are generally very cheap but I want to be able to make this change on a factual basis. I want to directly compare the performance of my actual investment over the last 5 years with the performance of the same money had it instead been directed into a variety of passive mutual funds. Yet such a simple task appears to be beyond my current capabilities!
Help! I need somebody.
As the Beatles said, won’t you please, please help me! How should I approach this quagmire?