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Eureka Report
PORTFOLIO POINT: Over one year, investors paid fund managers handsomely to underperform the index.
They can't beat the index, they can't stop trading and worse still, they can't stop flooding retail investors with unwanted tax bills. Australia's biggest fund managers might have a higher profile but a new Eureka Report survey shows the household names of Australian managed funds sector are the worst performers in the market.
Despite the almost perfect conditions for 19 leading fund managers in the year to June 30, 2007, the outcomes for retail investors are hopelessly inadequate.
* Over the five years to the June 30, 2007, only three of the 19 funds managed to beat the average market return.
* In the year to June 30, only one managed to beat the average market return, of the ASX300 index.
* The average one-year income from the sample of managed funds was 15.46% – about four times the sharemarket average. Because this income is taxable, it makes the funds very tax ineffective.
* Over one year, the average managed fund in the survey underperformed the average market return by a whopping 3.56%. (Think about that in terms of an investor with a $100,000 fund holding and paying a fee of 2%. They paid $2000 to a fund manager to end up $3560 behind the average market return).
Our survey sample
This is the third time Eureka Report has run this survey of managed fund performance. Previous surveys were featured on February 12, 2007, Funds' disappearing act, and August 2, 2006, Planners' money drain.
We selected the same 19 fund managers as in the three previous surveys because they represent the 'household names': the biggest funds at the biggest investment companies that virtually control the nation's investment fortunes.
The sample is ‘large company active Australian share funds' with a performance record of at least five years. The five-year performance criterion is important because it moderates the ‘survivorship bias’ that occurs when poorly performing funds are closed down and new funds started in their place.
Our special area of interest in this survey is in the level of managed fund income, or distributions, that are paid.
From the names that dominate our survey – AMP, AXA, BT, Colonial First State, ING and Macquarie – it seems reasonable to assume that if anyone can assemble the resources and personnel infrastructure to ‘beat the market’ it should be these firms.
But they don't. As a well-informed investor you may already be aware of the shortcomings of our leading funds managers, but the sting in the tail is the high volume of short-term trading run by these funds, which in turn cuts away at your take-home returns.
Why high levels of managed fund income are bad
There are two ways that a managed fund investor receives an investment return. The first is that the managed fund increases in value. This is a great way for an investor to receive their return, as there is no tax paid on this growth in unit price until they sell. This effectively defers the tax payable on this growth – potentially for ever or at least as long as it takes to shunt it into tax-free status in your DIY fund.
The second way that an investor receives a return is through distributions. This is a much less tax-effective way of receiving a return as the distribution is taxable. Some of this is likely to be fully franked income, probably the first 4% of a distribution in the current market environment, with the rest of the income being a distribution of ‘realised capital gains’.
What this means is that over the course of the year the managed fund has been trading some of its shares, and has made a profit on the sale of some shares, a realised capital gain, and has had to pass those capital gain on to investors to be taxed.
That is why for taxable investors and superannuation funds it is much better to receive a small income distribution and a large increase in the managed fund unit price rather than the other way around.
But investors want the completely opposite outcome – it's one of the reasons so many investors are disappointed with the take-home returns from what looked like a very strong initial return in their managed fund.
Moreover, even non-taxable investors (people on a 0% tax rate or superannuation funds in pension mode) should be interested in the level of the distribution, as a high level of distributions is a sign of a high level of trading within the fund – which is expensive and generally ineffective.
Survey Results
The table below shows the full results. Only one fund, the BT Imputation Fund, beat the ASX300 index over the year to the end of June 2007, with the average fund underperforming by a whopping 3.56%. Over five years, three funds managed to outperform (Challenger Australian Share Fund, Suncorp Australian Shares Fund, BT Imputation Fund – highlighted in table) while the average underperformance was a significant 2.11% a year for the five years. That would have cost investors a total 11% on their final return over the five year period.
What about the level of distributions?
The average level of distributions for this sample of funds was 15.46% over the past 12 months and 9% per year over the past five years. This shows the extremely high level of realised capital gains that are being passed on to investors to be taxed. After tax this effectively decreases the returns from funds that have already provided nothing more than disappointing returns over the period studied.
The unwanted award for the biggest distribution goes to the AXA Australian Equity Growth Fund. According to its own website, it had a one-year distribution to June 30, 2007, of 25.1%. It had already failed to keep pace with the ASX300 index over the past 12 months and, after paying tax on their 25.1% distribution (of which only a small portion will have franking credits attached) investors might be asking themselves whether they are really capturing their fair share of the sharemarket boom.
Similarly disappointing for retail investors was the final outcome at the widely held Colonial First State Imputation Fund. According to its own quarterly update, the one-year return to June 30, 2007, from the fund was 20.85%. This came through a negative capital growth of 2.32% and a distribution of 23.17%. That is, in a year where the value of the sharemarket increased at an extraordinarily rapid rate, the value of Colonial First State Imputation Fund units actually decreased, due to a large and taxable payment of income and capital gains to investors. Interestingly, the pension version of this fund had a return of only 21.89%, indicating that the level of franking credits was around 1%. (We can calculate that because we know a pension fund will receive a return plus the value of the franking credits received back as a refund). For a taxable investor, this level of franking credits would have only offset a small amount of the total tax payable on a 23.17% distribution.
The standout performer for this survey period is the BT Imputation Fund. This fund had a 31.32% return with a relatively modest taxable distribution of 6.82% – all in all a pretty tax-effective return for a fund that stands alone in beating the average market return. It also beat the market average return over five years.
Superannuation funds
There is one subset of funds in the Australian environment where we can actually examine after-tax returns: superannuation funds. Most funds report their returns after tax and fees. They can report after tax because being a superannuation fund they have a known tax rate of 15%, and 10% for long-term capital gains. This is different to managed funds, where different investors will have different tax rates. (That said, there are only four real tax rates for individuals, so it should be possible for managed funds to simply report after-tax returns for these different rates. This would be handy for investors; since tax is a reality and therefore before tax returns are far less important that after-tax returns.)
Using the figures for the Vanguard Wholesale Australian Shares Index Fund, which reports its performance after tax, the return after tax on this fund at the super fund rate was 29.3% to the end of June 2007. This is an important benchmark because this is simply an index fund that does nothing more than capture the average market return, less some fees. It is interesting to note that this is slightly higher than the before tax return of this fund, because of the tax refund of excess franking credits.
The SuperRatings website rates provides after-tax, after-fee returns for 77 Australian share super funds. Of these 77 funds, the average fund return was 26.5% – nearly 3% below the after-tax, after-fees return from the Vanguard Australian Shares Index Fund. Only four funds managed to beat the index fund in terms of performance. To put it another way: 69 funds did not beat the average index return after tax.
Put simply, the average investor in the 77 funds that make up this SuperRatings selection would have been better served by 2.8% (or $2800 on a $100,000 portfolio) using a simple index fund rather than the predominantly actively managed funds in the SuperRatings survey.
Conclusion
There are two clear conclusions in this survey. First, investors who look to managed funds to provide an above-market average return should take the time to look at the performance of managed funds as a whole (and then the returns from their individual holdings) to see whether this faith is justified. They will invariably be disappointed.
Second, the tax-effectiveness of managed funds is under question and the sooner all funds move (or are forced) to report after-tax returns the better. It is not hard and surely, if investors are paying fees of up to 2% a year they deserve to know how their funds have performed in terms of 'take home' returns. After all, that's all that matters. |
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法式杏仁饼干（终于完成，欢迎参观） (2009-4-3) xiaopangzi 
发表于 2007-9-1 19:31
