In its latest Fat Cat Funds Report, investment service Stockspot said there are currently 521 “fat cat funds” which perform worse than their peers over one, three and five-year periods and, over the whole period, underperform by at least 10 per cent.
According to Stockspot, these funds hold $45.6 billion together and receive more than $600 million in fees on an annual basis. The average fee charged in this group is 1.99 per cent.
The analysis considered the performance of 4,102 funds’ performance since 2012, the founder of Stockspot, Chris Brycki said, explaining: “When comparing funds within a similar investment category (i.e. Australian shares, balanced, growth, etc), we found that fees explain the majority of differences between their performances.”
“Some fund managers can do better than others over short periods of time, but our analysis found that less than 1 in 25 were able to consistently beat their peers by a noticeable margin over five years. Consumers would benefit greatly if they simply looked for a super investment mix consistent with their timeframe to retirement and the lowest possible fees.”
Further, while Stockspot’s analysis found that fees “matter massively”, funds are reducing fees slowly, if at all.
“Across the board we find most Fit Cat Funds have low fees and most Fat Cat Funds have high fees,” said Mr Brycki, defining a Fit Cat Fund as one which has beaten its peer group over one, three and five-year periods by at least 10 per cent.
“The impact of high fees is more apparent with each passing year as funds find it more and more difficult to generate better returns to make up for the drag of their costs.”
Customers with retail funds tend to pay higher fees, however “once all costs are properly disclosed the data indicates that the difference is only marginal”, Mr Brycki said. That’s because “most consumers” with industry funds pay higher fees for active management.
It doesn’t help that a “significant amount” of savings are in grandfathered products with the attached earlier and often higher fees.
“The unfortunate news is that 521 Fat Cat Funds still exist and $45.6 billion is trapped inside them. It’s not the first time many of these funds have appeared on the list,” Mr Brycki said.
“Yet little is being done to reduce fees or move members into better options. These funds rely on consumers’ lack of awareness and for the most part they have avoided scrutiny.”
According to Mr Brycki, the financial advice industry has conflicts due to a combination of poor financial literacy and vertical bank integration. These conflicts of interest “are so deeply embedded” that they have “led to a situation that impacts many Australians, who will not be able to afford a comfortable retirement due to the impact of unnecessary fees over their lifetime”.
Most Fat Cat Funds (29 per cent) charged fees of at least 2.5 per cent, followed by 21 per cent which charged fees of 2.0-2.5 per cent per annum (p.a.). At the other end of the spectrum, 59 per cent of Fit Cat Funds charged fees between 0 and 1.5 per cent p.a.
On average, those in Fat Cat Funds saw 24 per cent of their returns lost in fees, compared to 8 per cent of returns for those in Fit Cat Funds. For a consumer in the financial and insurance sector, this means $309,087 in fees over a lifetime, or for someone working in hospitality - $203,059, and for someone in mining, $427,482.
According to Stockspot, given that Fat Cat Funds charge an average 1.99 per cent p.a. fee, the average Millennial “can expect to lose over a quarter (27 per cent) of their potential super savings in fees”.
“Too many Australians are unaware of the impact that compounding high fees have on their long-term savings. By switching out of a fund charging 1.99 per cent per year to one charging 0.5 per cent per year, all other things being equal, a male Millennial could increase the super they’ll have by $355,957 and female by $306,291,” Stockspot argued.
The average Generation X male with a Fat Cat Fund has lost 20 per cent of returns in fees, while the average female has lost 19 per cent. Both male and female Baby Boomers in Fat Cat Funds lost on average 10 per cent of their returns in fees.
However, Stockspot said: “It is important to stress that the Fat Cat Funds Report is not a list of funds that should be automatically exited. The report is based purely on factual analysis of past performance which is not necessarily a guide to how it will perform in the future.”
Nevertheless: “Unless there is good reason to believe performance will turn around based on an assessment of the fund's prospects, it may make sense to look at alternative investment options.”