Your questions answered
Question: What about the impact of fund manager fees on returns? The more funds the more fees I would have thought.
Answer: On average, wholesale funds are about 1% cheaper than retail funds, so consider investing in wholesale funds where possible. Active managers will generally charge more in fees than passive managers, so consider a passive core allocation such as index funds to lower the overall cost of investing. Beware of performance fees (if applicable) and be conscious of the fact that global funds are generally more expensive than funds investing in domestic assets only. In principle, the more complicated the strategy, the higher the fees. When considering the total cost of investing in multiple managed funds, it's important to remember that fees are being apportioned based on the percentage allocation you are making to each fund. So it is possible to make more investments at a lower cost if you select the right funds. The cost in fees will not usually increase incrementally based on each investment. In my webinar examples, I invested in 7 core index funds, cash and 3 active satellite funds and the average fee across the funds was 0.56%. Using the Schroder Balanced Fund as a 50% core allocation, I then invested in 8 active funds with an average management fee of 0.93%, but the total portfolio average was only 0.83%. In this case, the 50% allocation to the Schroder Balanced Fund actually dropped the overall average cost.
Question: If you're starting out with the minimum investment amount ie. $1000.00, do you still use the same rules as if you're investing $100,000?
Answer: The same basic principles of portfolio construction and asset allocation that I outlined in the presentation apply no matter how big or small your portfolio. Of course, the only thing that will change is the amount of money you can allocate to each investment. This might mean taking a different approach to investing, investing in a multi-manager or multi-sector fund, or using a core/satellite approach to ensure you can generate the desired level of diversification and exposure you want. RaboDirect offers investors the ability to invest in wholesale managed funds for as little as $250, so you can begin to build a diversified portfolio with just $1,000.
Question: Some funds are 'balanced' - how important is it to diversify in different Funds as opposed to a few 'performing' funds that meet your agenda?
Answer: I referred to managed funds as 'solutions based investments' in my presentation, and with more than 11,000 funds in the Australian market, there is likely to be a fund that suits most investor needs. If you would prefer to invest in a single fund, consider a multi-sector fund which invests across different asset classes. A multi-manager fund will also invest in different asset classes, fund managers and investment strategies. Alternatively, you may only need to make an allocation to international equities to complement the rest of your investment portfolio. It really depends on how you've structured the rest of your portfolio as to how best to allocate to managed funds.
Question: How does one determine an active/passive manager?
Answer: The investment strategy of a fund manager and the objective of the fund is usually very clearly outlined in the Product Disclosure Statement (PDS) for each fund. Here the fund manager will usually also provide an overview of their investment philosophy. You may also notice that passive/index funds have lower fees and are purely designed to track a prescribed index such as the S&P/ASX200.
Question: Are you able to explain the RaboDirect morningstar rating at some stage?
Answer: The most important thing to remember when looking at the Morningstar star ratings is that they should only be used as a guide. They are a weighted quantitative ranking based upon the performance of the fund over the past 3, 5 and 10 years relative to their benchmark, performance of peer funds and scores the risk adjusted returns over these periods. A more detailed overview of the ratings methodology is available on our website under the Morningstar link on our
Fund Selector page where you can find and buy managed funds.
Question: What would you classify as being a low brokerage fee in this day and age, compared to a high one?
Answer: Value for money is the best way to determine whether you are paying too much in fees. As a guide, ask yourself whether you could achieve your investment objective more cheaply without having to compromise on quality. Check carefully whether entry, exit or ongoing fees are applicable. If they are charged, ensure you are comfortable with what you are paying, and what you are getting in return. You can avoid entry, exit and ongoing fees and still get excellent value for money. Of course, if you are receiving some form of ongoing administration, you should expect to pay for it - there's no such thing as a free lunch! If ongoing fees do apply, you need to be aware of the impact that they can also have on the total performance of your portfolio.
At RaboDirect, we offer a highly transparent fee structure, and only charge customers brokerage (0.50% - 0.75%) on each manage fund investment. The brokerage may vary for each fund and is detailed on our fund selector where customers can search, sort, buy and compare the funds and fees offered by RaboDirect. Once the brokerage is paid, there are no other fees payable to RaboDirect for the life of the investment. Our brokerage covers the ongoing use of our investment platform by customers to buy, sell and manage their managed funds portfolio online 24/7 with the safety of leading internet banking security.
We also provide consolidated online reporting, tax and administration, the ability to buy and sell funds in parcels to better manage potential tax obligations as well as access to a range of market leading investment tools and resources. There are no entry, exit or ongoing fees payable with RaboDirect. More detailed information on fees is available in the
IDPS Guide.
Question: To clarify - if I want to mirror the performance of an index by investing in 5 stocks, how should I select the best stocks to achieve this? ie the stock's beta, market capitilisation etc?
Answer: Best of luck trying to match the performance of a 200 (S&P/ASX200) or 300 (S&P/ASX300) stock index with 5 share stocks in your portfolio. If you come up with a methodology that works, please let the rest of us know!
Question: My research has shown that generally fund managers I have looked at generally do not have a good track record in global/international investments, do you have any comment in this regard given that you are recommending thinking globally?
Answer: In my presentation, I suggested that investing globally is important when you are considering options for diversifying your portfolio. Investing internationally does not suit everyone, but in limiting yourself to just the Australian equity market, you are essentially only investing in a market that represents an estimated 3% of global market capitalisation. So why deny yourself access to the remaining 97%?
Using the MSCI World and MSCI Australia Index for the purpose of comparison, the MSCI World Index is more broadly diversified and also has significantly more industries and sectors. By contrast, the MSCI Australia Index is highly concentrated to Financials (22% of Australian Index, or 8% of global index) and is also overweight to Mining and Metals (25% of Australian Index, only 4% of global index).
The Global Listed Property market is roughly 1135% larger than the heavily concentrated Australian Listed Property sector. Global markets can be more volatile and you will need to consider the impact of currency volatility and hedging. In my presentation, I showed the impact that this can have given underlying currency volatility.
One way to partially neutralise currency volatility is to consider splitting your allocation between hedged and un-hedged strategies. By way of comparison, I have segregated the Australian and International Equity funds on the RaboDirect platform and then averaged the performance across all funds using data effective 31 July 2009. The average Australian Equity fund generated 14.66% for 3 months, 27.44% for 6 months, -10.01% for 12 months, -14% for 2 years and -1.17% for the past 3 years. International Equity funds generated 9.15% for 3 months, 11.31% for 6 months, -9.02% for 12 months, -12.84% for 2 years and -3.67% for past 3 years.
So as you can see, even from this very simple analysis, performance can vary from period to period, so picking the best fund is not always the key, it's a combination of finding experienced managers that you are comfortable with and blending their funds with the rest of your portfolio to optimise your return profile. You could waste a lot of time trying to pick the best manager and fund, and it's unlikely to pay off in the end.
