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How to pick a fund manager without drama

Picking a fund manager is a bit like going to a hairdresser. You can play it safe with what you know, or handover control in the hope of...

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Should you let a fund manager look after your money? I’ll revise that question; should you let a fund manager spend your money on assets that should ideally, make you money?

If you’re already financially savvy or you’re thinking about upping your investment game, the world of funds management is something you need to know about.

At its most basic level, funds are just like your superannuation fund, and making these structures work to your benefit, and indeed their own, are investment professionals.

When you choose to invest your savings in a fund you generally do so because you think that outsourcing the management of your money will give you access to a wider range of asset classes and allow you to generate higher returns than you could achieve by doing it yourself.

But the cost of using a fund manager will either be more or less expensive depending on how hands on the management is.

And that’s when the terms Active or Passive type-funds come into play.

So what’s what?

A passive fund usually has low management fees because they are seen as being less work for the manager.

The fund manager’s job is simply to ensure that he owns a portfolio that reflects a particular market index.

An active fund is typically more expensive. This is because the portfolio is built to do better than a market index.

A specialist investment expert is used to pick assets that should outperform and avoid those investments which are likely to underperform.

The trouble is that most active funds underperform their index after taking into account the fees you pay.

From January 1 until the March 31 of this year, just 19 per cent of US mutual funds invested in large caps outperformed the S&P500 index and the average large cap fund manager underperformed the index by 1.9 per cent.

The same can be said for the Australian market. Research by S&P has shown that over a five year period 70 per cent of large cap equity funds underperformed their ASX200  benchmark, and NOT ONE bond fund outperformed the benchmark over a 1 year period to June 30, 2015.

So who are the big passive funds managers and how do can you access their funds? Vanguard, Blackrock and State Street are three of the largest passive investment managers.

All have exchange traded funds (ETFs), which offer a low cost way of accessing passive market exposure.

But tread carefully to ensure that the ETF you choose, is tracking an index not looking to outperform the index using a strategy of some sort, which you will inevitably be paying for.

And when can the use of the active manager be most fruitful?

Active management has been most valuable in markets where there is less information like Australian small caps or emerging markets.

It’s estimate that 70 per cent of Australian small cap managers have outperformed their benchmark over five years…a very different outcome to their large cap peers.

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