Keeping track of investments

Q. I have been intrigued by your constant remarks suggesting that your readers and the public in general use the services of fund managers rather than rely on their own intelligence.

A survey carried out by the Financial Times two years ago, and subsequently confirmed by KPMG, showed that over five, 10 and 20-year periods more than 90 per cent of fund managers underperformed the various indexes against which their performances were measured - Footsie 100, 250 and small cap indexes.

I am not sure whether the survey was measured against any American indexes so cannot comment in that respect, but probably the American counterparts were no better.

You may be interested to read the attached article taken from Investors Chronicle and use some of the more salient points for a future article. But please do not keep harping on about fund managers.

Any intelligent person can do as well as or even better than them by setting up their own tracker portfolio which, without the entrance fees and monitoring fees, would outperform the great majority of the professionals.


A. I, in turn, am intrigued to be told that I suggest readers use the types of funds you are writing about - "active" funds whose managers select what to invest in. When did I say that?

Whenever I recommend a type of share fund, it is always index funds. These simply invest in the shares in a market index.

Their performance roughly matches the sector of the market represented by their index, big or middle-sized shares - although they often lag behind the index a little because of the expenses of running the fund.

As you say, and I have said many times, over longer periods most active funds perform worse than indexes - and hence worse than index funds - because they cost much more to run and so their fees are higher.

Your attached article quotes John Bogle, founder of America's Vanguard Group of mutual funds, who points out how active funds' higher fees eat hugely into investors' returns over the years.

I've quoted Bogle before, too. And I invested in a Vanguard index fund more than 20 years ago when I lived in the United States. You're preaching to the converted.

Whether it makes sense for "any intelligent person" to set up their own tracker portfolio ("tracker" is another name for index fund) depends on several factors.

You can certainly do it if you have, say, $50,000 or more; you are happy to deal with dividends and other administration; and you will rebalance your portfolio every now and then to keep track of share price changes.

If you have less money, or you want to dripfeed money into the investment over the years, or you want someone else to run things for you, a low-fee index fund would probably suit you better.


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Q. The reason New Zealand investors are so committed to property and term deposits can be found each week in the business section of the Herald preceding your column, labelled "Managed Funds: Prices and Performance".

I have taken the largest five groups by number of funds and calculated a simple average of the five-year returns to investors (worksheet attached). The average of these five groups is minus 1.2 per cent (post tax and fees).

Yet their descriptions - diversified balanced unit trusts (average 1.4 per cent); international equity (minus 6.9 per cent); diversified bonds (1.6 per cent); diversified balanced superannuation (0.8 per cent); and Australian unit trust international equity (minus 2.7 per cent) - all have names and presumably objectives aligned with what investors have continually been told: diversify across markets - equity and bonds by country. These are truly appalling outcomes. It really does make dismal reading given that the five years covers strong equity markets and a global commodity boom.

You can today get over 7 per cent for one year (and more, given that they will pay interest quarterly) from our largest domestic banks.

So why would you invest in a managed fund, where their track record would indicate that if anyone is prospering it certainly isn't the investors?

Risk equates with returns. So why aren't five-year managed fund returns substantially above what are effectively safe pre-tax returns from the trading banks?

Term deposits have no entry fees, no exit fees, no transaction fees, no management fees, you pay tax at your marginal rate, not 33 per cent, and you will get all your capital back for certain (as certain as certain can be) at the end of the period.

The managed funds industry has a lot to answer for. Yet because so many are at the trough it seems to persist, as another lot of suckers find out who is really paying for the high salaries, high sharemarket turnovers, high advertising and high management fund returns.

What's good for the croupier is not always good for the gambler, to quote one Warren Buffett.

While these sorts of outcomes continue - and I can see no reason why they would change - investors will continue to invest in property and term deposits.


A.The recent performance of many managed funds has certainly been really disappointing.

And I'm not going to rush to defend funds that include actively managed shares, which would be the case for most of the funds you looked at except the bond funds.

As I said above, I recommend index funds rather than active funds, largely because their fees are lower.

All the same, when I look at the five-year performances of SuperLife, which runs a super scheme for individuals and employees using index funds, some of their funds did little better than the averages you sent me - although their bond funds did considerably better.

But is your analysis fair? We should note that:

* You did not include commercial property funds or New Zealand share funds. And SuperLife's funds in those areas performed really well in the past five years.

The property fund averaged 10.1 per cent a year and the New Zealand share fund 10.3 per cent - both after fees and taxes. That's well above term deposits after taxes.

* You say that the five years covers "very strong equity markets", but that's far from true for international shares.

Over the five years, the MSCI international share index fell an average of 10.1 per cent a year after tax.

Even when the index was hedged, to cancel the effect of the rising kiwi dollar, it still fell 4.4 per cent a year after tax.

I'm sure all the funds you looked at, except the bond funds, would have included international shares. The shocking performance of that sector no doubt pulled down all the fund performances.

But things have improved radically. Over the past three years, the hedged international index rose 13.3 per cent a year after tax and the unhedged rose 5.1 per cent.

And for the year ended September 30, the numbers are 18.1 per cent and 15.2 per cent. Take that, term deposits.

Note: Generally, five-year data gives a fairer picture than shorter-term data. But we really need at least 10 and preferably 20 or 30 years to draw sound conclusions.

The past five years include a huge market plunge, making it far from typical. It's a bit like a one-in-25-year flood.

* You compare managed funds unfavourably with property. But property, too, has its bad five-year periods.

In the five years ending June 2001, house prices (excluding apartments) grew an average of less than 1.2 per cent a year, according to Quotable Value.

That doesn't include rent, or the value of accommodation if you own the home. But nor does it include the expenses of buying, owning and selling houses.

And house prices fell over sustained periods three times in the 1990s. It took a full two-and-a-half years for the QV house price index to get back to its September 1990 level, and four years for it to regain its December 1997 level. How soon we forget.

Concentrating on those periods is, of course, unrepresentative. But the same could be said for your calculations.

Taking all this into account, I suggest readers don't turn their backs on at least one type of managed fund, the index share fund.

Long-term returns on these funds have been well above term deposits. And, if we're subjected to unexpected inflation, shares will fare better than fixed interest.

Over the long term, too, index fund returns average more than property - although, as noted in last week's column, comparisons between shares and property are tricky.

But one thing is certain: investing in an index fund is much less work than owning a rental property. I know which I prefer.

PS: I should declare that I have investments in SuperLife - because they use index funds and charge low fees.