The financial services industry in Australian does not serve investors well. For example, some 70% of managed funds underperform the index over a five-year period and for this underperformance investors are charged high fees. According to the ABS, the managed funds industry in Australia controls nearly $3 trillion of Australian investors funds. If the average fee is 2% then this is an income to fund managers of about $60 billion and that is just from the managed funds industry. If you add on the other non-performers or poor performers in the financial services industry to include brokers and advisors, then the figure is truly enormous.
In the case of financial advisors there have been many instances in recent years where investors have lost significant amounts or in some cases all of their capital. These advisors are not small outfits because all of the major banks have been implicated in this… Continue reading
Managed funds have a captive client base with Australian investors who are uncertain how to invest themselves or simply want diversification. But just how useful and competent are the fund managers?
I have used managed funds as part of our super fund investment strategy for more than 30 years. This has covered some 22 different funds and included the big managed funds as well as some of the smaller boutique funds. Over this period every one of these funds, without fail, underperformed the index. In many cases these funds actually lost asset value over several years.
In recent years I have continued to use what I consider to be the better managed funds as part of our super fund simply to get diversification. Also an important motive was to provide a safe long term diversified investment portfolio for my wife if I predeceased her.
But I am now… Continue reading
“Economic forecasts are almost useless”. That is the contention of Charles Morris in his book “The Sages” (2009) where he cites the example of the White House Council of Economic Advisers which comprises some of the best economists in the world. How accurate were their forecasts?
Consider the economic forecasts of this august committee over a decade, starting from the years 1997 to 1999 when they underestimated the US growth by about 50%. Realising their underestimation they increased their estimates for the years 2000 to 2003 in time for the tech wreck and recession when for this period they significantly overestimated the… Continue reading
Managed funds are a preferred option of many investors. According to the ABS, Australian managed funds, including superannuation funds and unit trusts, now control assets of more than $2 trillion. While some funds have performed well, most managed funds have a poor long term performance when compared with the All Ordinaries Accumulation Index and have not served investors well at all.
The following table shows the performance of the five largest and best performing Australian managed funds to August 2012. It can be seen that over a five year period the average loss of these funds was about 3% per annum but when inflation is taken into account investors in these funds have lost 6% per year in real terms, every year over the last five years.
This performance is totally unacceptable on two fronts. The first and most obvious one is that fund managers have destroyed their investor’s assets… Continue reading
Recent years have seen the development of a huge professional investment and wealth management industry in Australia. This is an industry which has with few exceptions been a miserable failure for the small investor. The extent of the problem is illustrated by the following table which shows the annual return over five years for the top retail Australian managed funds by size. These data are taken from the August issue of Money magazine.
The average annual loss for these five funds every year for five years was 3.03%. But given an average inflation rate for this period of close to three per cent, these funds have destroyed about 6% of their client’s assets every year over the past five years.
The average investor is naive about the finance and investment management industry. There is an extraordinary belief in the competence… Continue reading
Thanks to the planning and foresight of an unloved former treasurer Paul Keating, the Australian superannuation system through the super guarantee is potentially one of the best in the world. While the pension systems of most countries are badly underfunded, Australia’s is in reasonable shape. But these advantages are rapidly being lost because of the way in which superannuation contributions have been invested.
Most super funds over the past 5 years have posted significant losses for their clients. (see http://aust-investor.com/the-myth-of-australias-superannuation/). This represents not simply a loss to that increasing number of Australians who will need to have a government pension. It also means that there has been a destruction of capital that could well have been available to Australian business to further develop the nation.
Future Australian governments will have limited capacity to provide pensions to any but the very needy. There is a… Continue reading
With Australia’s superannuation system most Australians should be able to live well in self funded retirement but the chances are that few do at present and this is not likely to change in the future. Why? There are at least three reasons.
1. Australians generally assume that the professional fund managers are competent and will invest assets profitably. Nothing could be future from the truth. For example the following table shows that over a five year period the top five large equity funds in Australia on average when taking inflation into account, destroyed 6% of clients funds every year over a five year period.
2. Australians take no responsibility for their super assets. Merely taking a little time at the end of each month to monitor their investments would very quickly let them know if their fund manager was competent. But alas very few Australians make any effort to… Continue reading
The Australian education system does not equip persons to understand investing and this leaves them no alternative but to use professional fund managers. Professional managers have overall performed very badly and most funds significantly underperform the index. The table below which shows data on the top 5 performing large funds illustrates the depth of the problem.
Considering that these funds are the best of the larger funds, an after inflation return of minus 6% p.a. creates a significant problem for Australian investors. If Australians are dependent on investment funds of this type they cannot avoid significant loss of assets. It emphasizes the critical state of investment generally in this country but this of course this goes further because a loss of investors’ funds means that there is a loss of capital for investment by business in Australia’s development.
How can the deficiency in financial education… Continue reading
The average Australian has a very poor understanding of investing. The consequence is that in most cases they leave investing to professionals who may have a poor investment record. It is a matter of record that very few fund managers are able to beat the index and many whose funds have shown losses every year for 5 successive years. Why is this so? There are four propositions:
- The education system does not provide a useful preparation for investing.
- Australians are too busy raising a family and developing a career to learn to invest.
- There is a general perception that investing is too hard: leave it to the professionals.
- Finance professionals actively promote investing as being too difficult.
Let’s consider each proposition.
- There is little doubt that the Australian education system provides little information that is of direct use to Australian investors. This is unlikely… Continue reading
The Australian system of superannuation which was the brain child of Paul Keating is under threat. Lauded as one of the best pension systems in the world, it aims to provide funds to support Australians in retirement but also makes available much needed capital for business development. While it is acknowledged that pension contributions still need to be increased, by world standards the Australian government should be in a much better position to pay pensions than most almost any other country.
But the whole superannuation system is now under threat. The superannuation and pension system is now threatened by the poor performance of managed funds, many of which have produced negative returns for up to five successive years and this performance is much worse when inflation is taken into account. Australians who have invested with these funds will have virtually no prospect of a comfortable retirement and… Continue reading