Do higher fees charged by managed funds result in higher returns?

Original version published by TJ Ryan on 22 March 2017

 Canstar looks at how fees differ between managed funds and whether or not higher fees tend to equate to higher returns. 

Just as performance can differ greatly from fund to fund, so can the fees that are charged.

Canstar’s 2018 Managed Fund Star Ratings take into consideration the costs involved in investing in a managed fund, including both ongoing and one-off fees. Please note not all managed funds in the market are compared, and our comparison tables may not include all features relevant to you.

Fees that may apply to managed funds

Ongoing

Ongoing fees are typically associated with membership and administration of the fund and are generally charged indirectly to the consumer through lower investment returns. The following ongoing fees typically apply to managed funds:

  • Management fee, also called the management expense ratio (MER)
  • Administration fee
  • Investor/low balance fee
  • Performance fee

These fees and average costs are explained in more detail below.

1. Management Fee:

Managed funds charge an ongoing fee for managing your investment, often called the management fee or management expense ratio (MER).

This ratio may not include all administrative fees, so it’s important to check a fund’s prospectus for a full picture.

For managed funds rated in Canstar’s 2018 Star Ratings, the management fee ranges from 0.19% up to 2.50%, with the range varying across fund types.

% Management Fees on Managed Funds
Profile Minimum Average Maximum
Australian Cash & Fixed Interest 0.19 0.46 1.00
Australian Shares – Large Cap 0.35 1.01 2.05
Australian Shares – Mid/Small Cap 0.77 1.27 2.50
Equity Australia Real Estate 0.35 0.85 1.58
Global Fixed Income & Bonds 0.35 0.59 0.78
Global Shares – Large Cap 0.35 1.09 2.02
Global Shares – Mid/Small Cap 1.12 1.32 1.50
Multisector Aggressive 0.35 1.20 2.20
Multisector Balanced 0.35 0.84 2.42
Multisector Growth 0.35 1.00 1.95
Multisector Moderate 0.26 0.74 1.58
Based on fees as at 1 January 2018 for an initial investment of $50,000  for funds rated for the 2018 Managed Fund Star Ratings.

2. Administration Fee:

The administration fee is an additional ongoing fee some funds charge separately from their management fee, as reported by Morningstar. Of the funds researched and rated in 2018, the maximum administration fee charged was 0.15%.

3. Investor/low balance fee:

While rare, some funds may charge an extra fee when the value of the investment holding drops below a certain level.

4. Performance Fee:

A performance fee may be charged by the fund based on the fund’s performance over a specific period compared to the benchmark.

Most managed funds Canstar considers don’t charge a performance fee, but across funds assessed in our 2018 Managed Fund Star Ratings the highest performance fee was 35% (as at January 2018).

One-off

One-off fees are typically associated with the opening or termination of an account and are charged directly to the consumer. The following one-off fees typically apply to managed funds:

  • Transaction fees, also commonly referred to as the buy/sell spread
  • Account fees

These fees are explained in more detail below.

5. Transaction Fee (Buy/Sell Spread):

This is another fee common to most managed funds: the buy/sell spread charged whenever you make a transaction, such as making an investment into or withdrawal from a fund.

The buy/sell spread is the difference between the entry (buy) and exit (sell) prices of the fund, and is charged as a percentage of the value of the trade you’re making. The buy/sell spread helps the fund cover transaction costs involved in the fund buying or selling assets, such as brokerage fees, bank fees, and government taxes.

As at 1 January 2018, the buy/sell spread ranges from 0% to 1% for the funds rated by Canstar.

6. Account Fees:

Some managed funds charge fees for opening or terminating your account, such as an establishment fee, termination fee, contribution fee or a redemption fee. As at January 2018, the funds rated by Canstar did not charge an establishment fee, termination fee, contribution fee or a redemption fee.

However, you should look out for account fees regardless of whether the fund is rated by Canstar.

Do higher fees result in better performance?

Canstar found that across all types of managed funds rated by Canstar, a higher fee does not guarantee better returns.

Some funds may tell you their higher fee is justified because they are more active in investing your money, and the high fee is cancelled out by higher returns. Or they might say their fees are tiered based on how much you have invested, so as your investment grows you pay a lower percentage for its management. Ultimately, we recommend you should check before you invest to ensure you’re comfortable with the fee structure.

Of course, every now and then you’ll find a fund where the long-term returns far outweigh the higher fees attached. But this is certainly not always the case. Let’s look at some of the fees on a managed fund and assess whether paying higher fees has generally resulted in better performance.

It’s always worth remembering all information about performance returns is historical and past performance should not be relied upon as an indicator of future performance. The total returns outlined in the tables below are based on a $50,000 initial investment, calculated using reported monthly earnings for a calendar year over a five-year period ending 31 December 2017 for funds assessed in the 2018 Managed Fund Star Ratings. Performance, unit prices, and the value of your investment may fall as well as rise.

The total cost in each graph listed below is also based on an initial investment of $50,000, over a five year period, for funds assessed in the 2018 Managed Fund Star Ratings. The total cost figure includes the management fee, administration fee, and investor/low balance fee.

Each point in the graphs below represent a fund rated by Canstar. The higher the point, the better the fund’s return while the closer the point is to the left, the lower the fund’s total cost.

Single Asset Class options – Performance

Canstar rated single asset class funds within six different profiles:

  • Australian Cash & Fixed Interest
  • Australian Shares – Large Cap
  • Australian Shares – Mid/Small Cap
  • Global Fixed Income & Bonds
  • Global Shares – Large Cap
  • Equity Australia Real Estate

In looking at the performance of the funds within each of these different profiles, there’s no suggestion that funds with higher fees consistently provide better long term returns. In most profiles, the funds with the highest fees underperformed the majority of other funds.

Australian Cash and fixed interest

Australian shares - large cap

Australian shares - mid-small cap

global fixed income and bonds

Global shares - large cap

Multi-sector options – Performance

Canstar rated multisector funds in four different profiles based on growth asset allocation:

  • Multisector Moderate: 21%-40% growth asset allocation
  • Multisector Balanced: 41%-60% growth asset allocation
  • Multisector Growth: 61%-80% growth asset allocation
  • Multisector Aggressive: Over 80% growth asset allocation

In looking at the performance of the multi-sector funds within these different profiles, again, there’s no suggestion that the more expensive funds consistently provide higher returns. While the most expensive funds in the Multisector Aggressive and Multisector Balanced profiles did demonstrate the highest returns, in most cases, more expensive funds in each profile typically underperformed the majority.

Multisector moderate

Multisector growth

Multisector balanced

Multisector moderate

The bottom line

There is more to life than chasing the lowest fees, of course, but it’s vital to understand that the fees you pay can eat into your returns if you’re not careful.

So, in short, paying higher fees is not necessarily going to guarantee you a higher return.

Read about our latest Managed Fund Star Ratings to find out which funds rated well for pricing, investment performance, and positive features.

Managed Fund Star Ratings

Compare Managed Funds

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