There has been a lot of discussion over the years about whether to invest via actively managed or passively managed funds, and when it comes to investing for your children, naturally parents want what’s best for their kids.
In a nutshell:
- Actively managed funds are where the fund manager selects the investments and their weighting in the fund
- Passively managed funds, such as ETFs, are those where the investment allocation of the fund is generally determined by the composition of the underlying index the fund is designed to match. On a general basis, the performance of an ETF will mimic the performance of the index to which they are referenced, less a management fee of typically 20 – 40 basis points (i.e., 0.2% to 0.4%)
At itrust invest, our bias is towards actively managed funds. This is because we believe it is important for our investors to gain access to high performing funds, and a fund manager who is incentivised via performance fees, to outperform the index over the long term.
Fees vs Returns
Often when deciding whether to invest in an active fund versus a passive fund, the investor’s focus is to compare management fees of the two options.
In our view, by focusing on fees, the investor may be missing out on the higher overall returns offered by the actively managed fund and the correct comparison should be on the overall return of both options, net of the management fees.
Actively managed funds generally have higher management fees than ETFs because the active nature of their management costs more than the management costs of an ETF. Also importantly, the management fees of active funds include a performance fee component, i.e., the fee paid to the manager for outperforming the index.
How We Use Actively Managed Funds To Your Advantage
Let’s look at a comparison of the fund behind itrust invest’s Global Equities Unit, the Magellan Global Fund, and the index to which it is referenced, the MSCI World Net Total Return Index (AUD).
Since inception on 1 July 2007, the Magellan Global Fund has generated a return to investors of 11.99%, per annum, net of management fees over the period to 31 December 2021.
By comparison, the MSCI World Net Total Return Index (AUD) returned 8.2% over the same period. If this index were an ETF with a management fee of 40 basis points (0.4%), the return to investors would be reduced to 7.8%.
So, comparing like for like (i.e., return net of fees), the actively managed Magellan Global Fund has outperformed the ETF by 4.19% per annum over a 14-and-a-half-year period (i.e., 11.99% less 7.8%).
In dollar terms, assuming $10,000 was invested in both options at inception, the investment in the actively managed Magellan Global Fund would be worth $51,736 on 31 December 2021 versus $29,736 for the notional ETF – a gain of $22,000 over the period. That’s a huge gain in savings for your kids!
This gain is only possible because the Magellan Global Fund is actively managed with the capacity to assess market conditions and adjust portfolios accordingly, ultimately delivering on their intention to outperform.
itrust invest is aware of the rising consumer interest in both passive investing and active investing. Our investors interests are always at the forefront of any decision we make, and we will continuously assess both styles as we look to offer exposure to additional asset classes such as Australian Equities and Property. Investing is considered a marathon, not a sprint, and our investment options are designed for the long term, growing as your child grows.