SWEDEN – A study by AP7, the default fund in Sweden’s defined contribution pension system (PPM), has found that more than 94% of actively managed funds are “more expensive than hedge funds”, with fees outstripping returns over a three-year period.
The study – conducted by Håkan Tobiasson, an analyst at AP7 – was undertaken to see whether investors were getting good value for money when selecting actively managed funds.
AP7 said Tobiasson compared cost and performance over a three-year period for approximately 500 actively managed funds against what an average hedge fund would charge for equivalent performance, employing the ‘1 and 15’ model, with a 1% management fee and a 15% performance fee.
Tobiasson considered whether actively managed funds had positive returns both before and after fees, as well as whether those fees were lower than those charged by the average hedge fund for the same performance.
For more than 60% of the funds, he said, performance was negative over the period, and alpha was lower than fees and more expensive than what the average hedge fund would have charged for the same performance.
Further, while one-third of the PPM’s funds exhibited higher alpha than active management fees over the period, they were still more expensive than the average hedge fund, he said.
Of the funds analysed, only 5% fell within the category of ‘good performance at a reasonable fee’, Tobiasson said, “ticking all the boxes” in terms of positive alpha over the past 36 months.
AP7 recommended savers select index funds, or funds that closely follow indices combined with low fees, rather than attempt to pick the 5% that do well, pointing out that while they may have done well over the past three years, there are no guarantees this performance will continue.