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March 4, 2015

EU Commission to investors: Sorry, there‘s no Santa Claus

It may seem like flogging a dead horse, but it is worthwhile repeating that most actively managed funds represent poor value for investors. Although we have often highlighted on this blog the short-comings of actively managed funds, it is nice to read that the Financial Services User Group (FSUG) is coming to the same conclusions. The FSUGs remit is to advise the European Commission in the preparation of legislation or policy initiatives. The FSUG commissioned a major study into the performance and efficiency of the EU asset management industry and published the results in November 2014. We will just highlight some of the key findings:

  • Over the 10 year research period (2003-2012), actively managed equity funds underperformed index funds (ETF) by -1.2% p.a. Bonds funds underperformed by -0.8% and money market funds by –0.5%. Due to the compounding effect, even a ‚small‘ difference like 1.2% p.a. makes a big difference in the long-run. In the case of an €100,000 investment with a return of 7% p.a., a 1.2% cost difference equates to a staggering €21,000 after 10 years*.
  • There is no correlation between charges and performance. In plain English, you do not get better performance if you pay more.
  • It is generally not possible to make investment choices on the basis of past performance. So why bother looking at 1-3y performance data? We like to inject some sort of objectivity into the selection process but unfortunately, investing doesn’t work like this. It is all about the process and this is very hard to glean from the outside, especially for a retail investor.
  • The fees paid by asset management companies to distributors (IFAs, banks) are a real cause for concern due to the potential conflicts of interest raised. The distributor may have incentives to sell products that do not suit the interest of final clients.

If your portfolio mainly consists of actively managed funds, maybe it is time to ask yourself if you really got the best deal. If you feel it is time to take another look at all available opportunities, our Second Opinion Service maybe for you. As a fee-only advisor, we can provide you with unbiased advise. Our analysis will put you in a better position to make inspired decisions about your wealth.


* In fact, the difference is even bigger today. The study is based on the costs of index funds in 2012 of 0.61% p.a. However, today, many index funds can be bought for as little as 0.2% p.a. If we re-run the above calculation, but this time with a more updated cost difference between active and passive funds of 1.6% p.a. we get a staggering difference of nearly €28k over the 10y period.

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