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This commentary is written by Vanguard Principal, Corporate Affairs & Market Development Robin Bowerman. The title is How high fees erode returns

It was first published on Wednesday 25 July 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.

One of the main reasons why many actively-managed share funds have difficulty matching the index on after-fee terms is the size of their fees. In short, high fees can really erode investment returns.

As Smart Investing discussed early this week, just 131 (or 29.11 per cent) of 450 actively-managed, large-cap Australian share funds outperformed the S&P/ASX200 Accumulation Index over the three years to June 30, according to investment researcher Morningstar.

Significantly, the researcher calculated these returns on an after-fee basis.

Further research provided by Morningstar last week shows that:

1 The average ongoing fee charged by 391 large-cap retail share funds is presently 1.63 per cent a year. (The researcher defines a retail fund as one with minimum investments of under $50,000.)

2 The average fee charged by 126 large-cap wholesale share funds – with minimum investments of $50,000 and higher – is 0.9 per cent a year.

Undoubtedly, many investors pay more attention to the amount of money they are paying in investment management fees whenever sharemarkets are weak.

In the 12 months to June 30, the S&P/ASX200 Accumulation Index (which includes dividends) returned a negative 7.01 per cent. And interesting enough, many more actively-managed funds would have at least matched the index had their fees been lower.

Fortunately, investors who are concerned about the size of their investment management fees can choose to invest in lower-cost managed investments such as index-tracking Exchange Traded Funds (ETF) or traditional index funds.

And that concludes the column

How high fees erode returns

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.