Actively Managed Funds Are Killing My Money

Step 1: Mea Culpa

4
90
Actively Managed Funds

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.

Wrapper Fees

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

Investment Performance

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?

4 COMMENTS

  1. I know exactly what you’re talking about. 2 years ago I didn’t really know anything about investing, so I went to my parents financial advisor with some money, and decided I’d learn from experience. We bought some mutual funds with a 5.75% sales charge, and then watched. We bought at the right time because the value has increased, but now that I am more aware, and read alot more, I’m reading all the smartest people just invest in index funds like the S and P 500. I just opened a VTSAX account yesterday and bought a bunch. Imagine how good I felt to not have a sales charge! And start making money the first day rather than paying off the sales charge! I will probably hold onto my actively managed funds for a little while, just to see how they do in comparison, but it was liberating knowing I could do this myself and pay myself the sales charge rather than give it to a financial adviser. Because if I invest 10K and the sales charge is $575 dollars, that $575 will turn into alot of money in 30 years! I don’t necessarily regret using a financial advisor the last 2 years, because it was at least a place to learn and start, and since he’s alot older than me, I trust his sense of the market. (he has given us great timing advice in the past) I’ll probably keep my portfolio mixed between active and index funds for the time being, and then as I learn, let my gut tell me where to go. Thanks for the article. I’m exploring these same thoughts right now.

    • Hi Bill,
      Glad I am not alone, though I feel your pain too! Spot on about the fees. Based on a recent calculation I did for my coffee article, if you have an average wage and saved 10% of it each year for the next 30 years and invested it in an S&P 500 tracker, your $575 fee today is a loss of $11,235.17 of your future net worth at the end of the 30 year period! Frightening!
      Cheers,
      Paulie

  2. I feel you. I think moving into a passive portfolio would be the right move. Some times these advisors just charge you a fee for the privilege of owning money! Personally, I don’t invest in actively managed funds. Most of them are horrible. I have both a passive portfolio that tracks the S&P 500 and the broader market. I also have an active portfolio where I invest in a portfolio of individual stocks by myself.

    • You are a brave man to have a portfolio of stocks! I do have some as well but I know that I am out of my depth on that front…

      I plan to change into passive funds as soon as I can but I really want to be able to do so knowing 100% that my active funds have underperformed over the last 5 years. And right now I am having trouble figuring that out!

LEAVE A REPLY

Please enter your comment!
Please enter your name here

3 × one =