Fund Damagers

It’s probably no secret (just go read some of the “Pages” off on the right hand side, about money and investing) that I’m no great fan of Fund Managers.

Fund Damagers is what I normally call them, a bunch of blood-sucking leaches.

There are a rare few who don’t, but most – the majority – of managed funds charge a management fee. This fee is usually structured as a percentage of funds under management. Some add a performance fee.

The effect of these fees is that the fund manager gets paid out of your money, even if they make your investment go backwards, because they take a percentage of funds under management. And in the good times they still take that fee, as well as helping themselves to a portion of the “outperformance”.

The net effect of this is that the chaps from the fund manager get to drive a new Beemer each year, because you and I pay for it come what may.

So…

In spite of my dislike of Fund Damagers, 5 years ago I tipped some money into 3 managed funds. I did this to build a fund for the children’s education – figuring that I’ll try and invest my own money for my future but in case I screw it up, I’ll rely on the much-lauded, much applauded fund managers to safely handle a few quid to pay the kids HECS fees when they need it.

Measuring fund managers performance in good times is a pointless exercise, because even a dead donkey can make money in a rising market. Measuring fund managers performance in bad times sorts out the wheat from the chaff.

Now, 5 years after investing with those funds, we are in the midst of the current market meltdown, so its a good time to reflect on their performance.

Each fund was bought at the same time – 5 years ago, all within about a 3 or 4 month period.

Each fund is set up so that the fund distributions are reinvested.

So how have our funds gone?

  Fund 1 Fund 2 Fund 3
Amount Invested $3330 $3853 $9504
Current Value $3274 $4443 $9439

The amount invested includes the distributions from the funds over the 5 years, so the original amounts were less. However, I pay tax on the distributions and the tax paid is not included here.

What this shows is that the fund managers, over 5 years, have gone backwards in 2 of the 3 cases. When the tax I pay is taken into account, they have all gone backwards.

Thank you, Fund Damagers!

I thought it appropriate to remark on the performance, because it’s the time of year when the Fund Managers evaluate their performance and go on an orgy of self-congratulation about how well they have done, and hand out awards for the best performing fund in the last year.

Perhaps they should look at total return over a longer period!

3 Comments

Retirement and Investing
Nearly 16 years ago I was forced into early retirement. I didn’t want to go but there was no other option available and I was 57 years old. The pension scheme I was in was set up so that the very worst age to retire was 57; one year later and I could have had a pension that I could live on. Three years later and the scheme would have been at full-term and we would have been very comfortably off. So I had to do something about it. I had the chance to commute 100% of the pension i.e. get back everything I had put into it [6% of gross income for some 30 years] plus a bonus for not bothering the inflation adjusted scheme ever again and a ‘golden handshake’ for going away. Many of my colleagues were in the same position and collectively most of us decided to take all the money and invest it ourselves.
This was a good decision as at that time the All Ordinaries Index was about 1525 and just starting to go up. There were all sorts of restrictions about getting hold of your money as the Government did not want people blowing a large cash windfall and then lining up for the age pension. But at that time, inflation was at last under control thanks to the policies of the Hawke and Keating Governments. So those who stayed on the inflation adjusted pension were years later still on much the same fortnightly payments. It was costing them more to live as the Howard Government directed the Commonwealth Bureau of Statistics to take certain items out of the Cost of Living Index which gave the illusion of low inflation. This so disadvantaged the pensioners who left when I did, that the Trustees of the scheme have had to make several ex-gratia payments to top up their pensions to avoid real poverty. Most of them are today on a part Age-Pension as a top-up to the pension they paid for all their working lives. So much for a ‘good’ government controlled Super Scheme!
So 16 years ago I gingerly started buying shares and about that time the market started to rise. With only a few reverses it has continued on its way to over 6000. Along the line, I was tempted to go into Managed Funds and also looked at starting my own superannuation fund. I didn’t go into self-managed super as the administration and compliance costs are quite high and the amount of paper work is daunting. I did put some money into several Managed Funds schemes to see what they could do but whether I chose badly or at the wrong time, they never did get anywhere near their Prospectus estimates of earnings. There were always wonderful excuses about stock market downturns in India, Japan and the USA etc but my own shares were steadily increasing in value because they were invested in good Australian companies. And because I had been well-advised my shares were paying good dividends and every year since I retired I have far outstripped the amount I would have made had I even been able to stay working until 60. The Managed Funds were sold many years ago and on every one I made a loss. One of my colleagues who retired when I did put all of his money into a Credit Union controlled Managed Investment. He found that they were turning over his money into different investments once or twice a year [churning it’s called] and taking 3% of the amount churned each time. He had to go and get another job to have enough income on which to live. Lesson learned.
For cautious investors there are ‘Listed Investment Companies’ [LIC’s] such as Argo and Australian Foundation. These companies are not Managed Funds but buy shares with your pooled funds and pay you an annual franked dividend so if all your money is invested with them, you will certainly not make as much as directly holding the shares but you will also not pay any income tax on your dividends. They have long-term investment goals.
Many years ago, my investment adviser who works for a stockbroker said that the goals of the manager of a ‘Managed Fund’ were far different from mine. His goal is to keep his job and to do this every quarter he has to make it appear that his Fund is making money. Most of the Stock Market manipulation is occurring because of the need of the Fund Managers to make [or appear to make] short term profits.
So what’s the downside of investing for yourself? Well let’s list some of the disadvantages:
Takeovers: Every year one or more of the companies we bought [usually many years ago] is taken over and we get paid out. This results in a large capital gains tax which means that the Federal Government is stealing part of my investment capital. It also means a steady reduction in the number of good companies available to small investors as most takeovers result in a large and poorly managed conglomerate. It’s particularly galling when you see the company that you once partly owned sold on again and then broken up [think Faulding]. It also means that you have to find another company in which to re-invest; one that suits your investment goals and which will provide the dividend stream that you had from the taken-over company. In times of an inflated market, you are left with higher than desirable cash holdings as you do not want to be buying when the market is known to be inflated.
Tax Situation: There are simply no concessions for truly self-funded investment retirees. The past couple of years saw the Howard Government make enormous changes to the laws governing superannuation with the consequence that many pay no tax at all on their retirement pensions and many very highly paid are undergoing salary sacrifice to get enormous tax deductions while they are still working. I wonder what they will be saying when they see that their Allocated Pension scheme, Managed Investment Company or Super Fund has managed to lose quite a high percentage of their retirement savings. My net worth is considerably less now than it was a few months back but my income stream is almost unchanged and the stock market will recover and go up again. But I don’t have to sell shares to meet some sort of investment target so my ‘losses’ are just unrealised capital falls.
Record Keeping and Accountancy Issues: there is the need to run some sort of accountancy software and to keep all the papers together and one a year visit a tax-accountant and pay to have your tax return prepared.
Speculating: A couple of former colleagues were tempted by schemes offering high incomes from day trading and paid many thousands of dollars for software and training courses that were going to bring them great riches. They soon found that it was very hard and stressful work especially as they were betting on the market with their own money. They gave it away rapidly and the money spent on software [usually enough to buy a small new car] was money wasted. Recent publicity showing how the large companies have been manipulating the market by ‘short selling’ and ‘stock borrowing’ show how futile it is for the lone speculator at home to try to compete against the big boys.
Summary of the advantages of self-funded retirement:
After 16 years it is a marvellous feeling that you never again have to be beholden to any Government of any persuasion for anything. They cannot control your income and/or your life. But it’s a disgrace that they keep stealing [Capital Gains Tax] some of my investment capital each year due to takeovers beyond my control.
You can put aside or draw down money as you need for a new car or an overseas trip or for household improvements/maintenance.
You can control the amount you earn and dispose of capital surpluses to your children as they need it more than you do when their children are growing up.
And there will be a nest egg for the children when one day we shuffle off these mortal coils. How much of a nest egg is left when your super scheme no longer has to pay you?
Those of us who took all the money and carefully invested it are still doing well and far better than the inflation-adjusted pensioners and certainly far better than those who went into any Managed Fund or Allocated Pension.
The moral of the story is to keep out of the Government’s clutches if you possibly can; get good advice and don’t speculate but invest for the long term rather than for short term market gains or for tax minimisation.

Comment by Dad | February 17th, 2008 4:31 pm | Permalink

Bloody Hell, I can’t beat Dad for detail – I just liken Fund Damagers to Naturopaths – why anyone would want to visit an obese ex-nail technician or plumber to seek treatment for irritable bowel is beyond me. Same with Fund Damagers

Comment by MillyMoo | February 20th, 2008 8:58 am | Permalink

This may sound odd but I arrived on your blog when I googled ‘flour weevils’ because we were going to do some baking tomorrow and were horrified to find evil weevils crawling in our bag of flour. Unfortunately we had to throw the flour away and buy some new stock, however, I saw the words ‘investing’ on your blog and nothing pikes my interest like that word :)
I’ve read a few of your posts on investing. I have to say, my thoughts and opinions on several topics mirror yours.
I had some money invested in Managed (aka Damaged)Funds years and years ago and fortunately exited the funds (to buy a car that was a lemon – not so fortunate).
I now invest directly on the market and would never contemplate investing in Managed Funds ever again. Especially funds that charge fees on entry and fees on exit. I’m sorry to hear that you held a corporate bond for the Great Southern timber…a colleague of mine recommended that stock to me in 2004 and I took a look at the financials(or lack thereof) and the way the business was structured and decided it wasn’t my thing.
Any investment or business that is structured to minimise or take advantage of tax – I would stay away from. Their focus should be on maximising profits/returns.
Anyway, love your casual writing style. I thought the “Snot Fairy” phrase was hilarious. Unfortunately I can’t quite blog with such a personal slant anymore due to a problem I had years ago with another individual, so my own blog is rather stiff and formally written. No more flair ;(
Lastly, your advice for those in their 20’s…love it! I’ve actually just started a string of post on my blog about money management for twenty something year olds coincidentally enough.
If you’ve got curiosity or time, a visit to my site and an opinion is welcome too … http://smartmoneyguide.blogspot.com
I’ve only just started actively blogging again now that I’m not using geocities anymore. Good luck with the investing, I will add you to my feed reader :)

Comment by Laks | October 2nd, 2009 10:31 pm | Permalink

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