Money for Nothing?

On Thursday Dagens Nyheter reported that Roburs vd Tomas Hedbrg had admitted that their most popular stock funds Allemansfonden and Kapitalinvest have probably not tried hard enough to beat their respective indexes (here).

He is quoted as saying that the funds had copied the indexes too closely resulting in just beating them just the once in the past 10 years. To fail to beat an index in itself is no big deal, plenty of others have tried and failed, but to not even try whilst charging a 1.42% fee is a complete failure to deliver value for its customers.

Both funds currently hold 70 billion sek in assets and pull in 1bn in fees avery year for funds that should be charging 0.4% as 'index' funds. That's 700m sek extra for doing nothing extra for their customers, a 175% markup! It's very easy too be cynical here and suspect they were treating these funds as easy money cash cows.

Why have so many people chosen these funds? Perhaps it's a lack of knowledge on their part and/or poor advice. The latter is more disturbing. Surely it goes against exactly what the professional advice should be telling their clients, 'avoid closet index funds'!

The following is a graph showing the funds performances over the past 10 years compared to AMF's World Share fund. All three hold a mixture of Swedish and global stocks, predominantly US and European.

AMF's is the clear winner over the past 3, 5 and 10 years (the Sharper ratio is also superior). The main difference? A far cheaper 0.4% fee. Interestingly in their material AMF claim this fund is actively managed based on low valuations and fundamentals.

The fund has a benchmarks that is 60% OMXSBGI (Swedish index) and 40% FTSE World Index.
Its relative performance is shown below, the benchmark normally wins but it's close; yearly compounded at 8.83% v 9.96%. Even with this better performing fund there is some room for improvement.

The take home message is fees really count. Some actively managed funds will be able to beat the indexes but they are few and far between. Without knowing specifically what strategies are being used by these funds it is unlikely you will find a future winner.

The absolute worst you can do is overpay for a fund that is no different to a passive fund. Know what the comparable index fund is charging and then try to find out what potential value the active fund is offering for the extra fees.

As an end note, Robur's admittenace of their mistakes is to be commended and they now say their two funds are being managed more actively in an effort to beat their index.

The question though investors should still be asking themselves is, will these funds be able to do so when so many others have failed and by a margin that will compensate for the high fee. Only time will tell!