Cape Town – The high fees charged by funds are the biggest dilemma in the investment world.
They make it increasingly difficult to outperform the market, said American expert investor Dr Charles D Ellis, who was was the guest speaker at the recent annual IMN African Cup of Investments Conference.
According to him, the reality is that an increasing number of fund clients will consider alternatives to active investment, namely passive investment or unit trusts that track an index (index trackers).
He said he recently realised how high investment costs actually are. “It's absurd to say that the fee is only 1% – and everyone says the same thing.”
As a percentage of assets this does not sound much, but as a percentage of yield it's very high. “When you invest you are not buying the asset but the return, and 1% is a great proportion of a portfolio that in coming years could yield 7%.”
Ellis said the prices of alternatives should be considered when you decide how expensive something is. There is an alternative and that is passive or index investments, where the fees are low.
He referred to research by Morningstar (which measures performance of funds) that showed “the lowest fees are the one thing that can predict which manager will deliver the best results in future”.
Ellis believes one of the big mistakes the industry makes (instead of giving advice) is to try and beat the markets.
“Fifty years ago it was easy to do so, because other investors didn’t have important research at their disposal, never met with the heads of companies and traded shares once in two years for reasons that had nothing to do with the market.”
Now there are investors who “are just as smart and informed and ambitious” as fund managers.
Ellis said that beating the markets is a game that has no winner.
This is not only because of huge competition, but also owing to the high portfolio turnover (how often assets in a portfolio are bought and sold), which increases costs.
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