MONEY COMMENT
Is It Worth Paying Fund Managers' Fees?

By Cliff D'Arcy
December 10, 2003

If you read a few of the articles on this website, you'll quickly grasp that we are big fans of investing in shares here at The Motley Fool. We hold them in such high esteem because, over the long term, they've beaten other conventional investments, such as cash, bonds and property. The stock market has a great long-term track record - and saves its greatest rewards for those who are patient enough to play a long game!

Most UK investors start out by investing in collective funds, where you hand over your money to a fund manager, who pools it with other investors' contributions and invests the entire pot. The majority of these funds are 'actively' managed, which means that your fund manager decides which shares to buy and sell.

These City stock-pickers aim to beat the overall performance of the stock market and, in doing so, earn themselves reputations as investment gurus. Sadly, most fail to make the grade: in fact, according to one independent report, nearly eight in ten actively managed funds (79%) failed to beat the benchmark FTSE All-Share Index over the twenty years to the end of 2002!

The reason for this is that a typical managed fund will take 5% of your investment as an initial charge, plus around 1.5% a year in admin fees. Thus, over a ten-year period, around one-fifth of your original capital (20%) will be swallowed in charges - and far more if your fund grows strongly.

To justify these eye-popping charges, many financial advisers try to steer investors towards 'star' fund managers, whom they believe will beat the market over time. However, the financial regulator has repeatedly pointed out that today's stars often become tomorrow's dogs, and past performance is no guide to the future.

Nevertheless, many investors are taken in by the legend of the star fund manager. Fund management group Framlington has taken advantage of this fact: last week, it hiked the yearly fees charged by five of its funds by a fifth, raising its annual charge to 1.5% from 1.25%.

This may have been done to meet the colossal salaries paid to elite managers Nigel Thomas and George Luckraft, but it smacks of profiteering to me! Admittedly, both of these gentlemen have great track records, but who's to say that they'll go on beating the market in the future?

Now, bearing in mind that you're paying a collection of surprisingly high charges - initial, annual and even withdrawal fees - would you be unhappy if your fund manager failed to beat the market? You bet!

Sadly, almost all fund managers don't deserve the fees they charge. That's why we recommend you invest in index trackers, which passively track the stock market's rises and falls, with little human involvement. Trackers don't employ high-priced managers, which means that their charges are far lower than most investment vehicles. The attraction of low-charging funds is that you get more of your money working from day one, giving you a huge long-term benefit.

I'll end with a quote from Warren Buffett, the $39-billion man:

"Full-time professionals in other fields, let's say dentists, bring a lot to the layman. But in aggregate, people get nothing for their money from professional money managers."

> Find out more about index trackers in our Tracker centre.