(Aug 21): Actively managed funds have been getting the thumbs down from nearly all quarters.

Investors have certainly made their stance known, taking money out of active funds (especially those with comparatively high expense ratios/fees) and piling into passive/index-linked funds, including exchange-traded funds. Globally, ETFs, with their very low fees, have grown exponentially — from US$807 billion in 2007 to US$4 trillion ($5.46 trillion) today.

This week, I’ve decided to take a closer look at the performances of some of the biggest actively managed funds. This is to substantiate claims of their underperformance relative to the market — the reason why investors are flocking to passive investing. The results are quite convincing.

In Singapore, three of the 13 largest balanced funds (that is, they invest in both equities and bonds) underperformed both the comparable equity and bond ETFs in the past three years.

They are Capital Group EM, Schroder Asian Income and Franklin Income.

None outperformed both the equity and bond ETFs.

Their annualised returns range from -3.2% to 4.3%. The average return (in US dollar terms) is 1.5% per annum for the last three years.

Three of the 13 suffered absolute losses — JPM Global Income, Capital Group EM and Franklin Income. Only two made an annualised absolute gain in excess of 3% per annum.

And these returns are before upfront sales charges.

In Malaysia, four of the 13 largest funds fared worse than both comparable equity and bond ETFs over the last three years. They are RHB Asian Income, Affin Hwang Select SGD Income, Public Islamic Mixed Asset and RHB Kidsave Trust.

Only five of the 13 managed to beat both the comparable equity and bond ETFs.

Their annualised returns range from -0.4% to 11.4%. The average return (in ringgit terms) is 4.7% per annum.

One of the 13 suffered an absolute loss, while only five made absolute gains in excess of 5%. They are RHB Asian Income, Affin Hwang Select Income, Affin Hwang Select AUD Income, Affin Hwang Select SGD Income and CIMB Islamic Balanced.

Fees always matter. Clearly, the less a fund charges to cover expenses, the more of its returns are left over for fundholders. As both tables (below) show, the total expense ratio for all the 26 funds — average of about 1.6% — far exceeds that for equity and bond ETFs.

To put all these numbers into perspective, assuming a maximum upfront sales charge of 5%, the annualised three-year returns for investors would be -0.22% in Singapore and 2.93% in Malaysia, on average. That is worse than putting your money in risk-free fixed deposits in both countries.

In short, these balanced funds (on average) — with poor performances, high annual fees and big upfront sales commissions — are hardly servicing the investors.

Why are these professional fund managers not performing? What do they invest in? What are their strategies? How do they evaluate investments?

These and similar questions will be the focus of <i>The Edge Singapore</i>. Our role is to help investors make better decisions, not just for stocks but also funds.

If you recall, I have discussed at length the risks posed by passive investments in their indiscriminate purchase of stocks chosen to replicate the index without regard for the actual facts or performance of a company. Their best feature — low fees — is also their Achilles heel. These risks will only grow as liquidity gradually reverses when central banks step back on stimulus.

What would be a good strategy to minimise both fees and risks?

Specifically, can a simple robo-investing strategy that picks stocks based on valuation or fundamental variables do better than actively managed funds that are staffed with well-qualified professional managers and analysts?

Stay tuned as we address and analyse these issues, comprehensively and honestly.

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<i>Tong Kooi Ong is chairman of The Edge Media Group, which owns The Edge Singapore</i>

Balanced funds: Not so balanced

Balanced funds: Not so balanced

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