Thank you for downloading the Smart Investing podcast from index fund manager Vanguard Investments Australia, on the web at vanguard.com.au

This commentary is written by Vanguard Principal, Corporate Affairs & Market Development Robin Bowerman. The title is Chasing the index

It was first published on Friday 1 June 2012

And is read by Michael Mullins

Please remember that advice in this podcast represents a general view. It is recommended that you seek specific financial advice, before making investment decisions.

When share prices are subdued or falling, investors are more inclined to question whether they are getting value for money from their managed share funds.

This is partly because the impact of investment management fees and taxes on returns are more apparent to investors in difficult markets.

Without doubt, the higher fees charged by actively-managed investment funds restrict their ability to match the returns of their appropriate indices over the short and long term.

Research by investment researcher Morningstar Australia – provided at Vanguard’s request – shows that only 201 (or 39.6 per cent) of 503 actively-managed, large-cap Australian share funds outperformed the S&P/ASX200 in the 12 months to 30 April this year. (Morningstar’s figures are calculated on an after-fee basis.)

And over the three years to 30 April, just 132 (or 29.39 per cent) of 449 actively-managed, large-cap Australian share funds outperformed the S&P/ASX200.

The five-year figure is particularly interesting because this period takes in the entire GFC. Over the five years to 30 April, 177 (or 47.07 per cent) of 367 actively-managed, large-cap Australian share funds outperformed the index.

Further, the majority of actively-managed funds have not succeeded in at least matching the index return when measured over the past decade – a time that experienced a wide range of market conditions.

Over the 10 years to 30 April, 60 per cent (or 34.8 per cent) of 174 actively-managed, large-cap stocks outperformed the index.

Given that a minority of actively-managed funds do manage to outperform the index, some investors choose to use a core-satellite approach to share investing. Under this strategy, they hold the core of their share portfolio in low-cost index funds or Exchange Traded Funds (ETFs) tracking broad sharemarket indices.

And then such investors hold smaller “satellites” of direct shares or actively-managed share funds with the ambition of achieving some out-performance.

And that concludes the column

Chasing the index

from Robin Bowerman,  Principal, Corporate Affairs & Market Development at index fund manager Vanguard Investments Australia

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Please remember that advice in this podcast represents a general view. It is recommended that you seek specific financial advice, before making investment decisions.