Fund Manager Sacked

This is long overdue, but I have finally got around to terminating the monthly payments I have been making to two actively managed funds. This is something that I should have done a long time ago and I must confess that my procrastination has cost me money.

By way of background, when I first invested in actively managed funds, it was difficult for Hong Kong domiciled investors to invest in funds in many markets outside Hong Kong. In some instances the withholding taxes were sufficiently high (30%) to make actively managed funds better than passive funds for a Hong Kong tax payer. In other cases, the fund managers simply would not let Hong Kong domiciled persons invest or imposed a very high minimum investment. As a result, if I wanted an equity investment, I had two choices (i) an actively managed fund with a front end load or (ii) the HK Tracker fund (an index fund which tracks the Hang Seng Index). This is one of the reasons why my portfolio is heavily weighted towards property. However, I still put some of my money into what funds were available (a) to achieve some diversification and (b) to have some assets in liquid form.

The position gradually changed over the last couple of years. Specifically, the front end load charged by fund managers has been progressively reduced and it is possible to negotiate low (or occasionally zero) front end load with at least some fund managers. Even if the front end load is zero, the MER (management expense ratio) still favours passive funds and I now have the ability to access enough of these to make it unnecessary to tolerate the high MERs of actively managed funds. Specifically, there is a limited choice of ETFs listed in Hong Kong (tracking the Hang Seng Index, NASDAQ, Korea, India, Russia, a commodities basket, China, Asia ex-Japan and the MSCI world index) and there are plenty of index tracking ETFs listed on the London Stock Exchange which are not subject to punitive rates of withholding tax. This eliminates any need to use an active fund manager.

The procrastination part is two fold. Firstly, London listed ETFs have been around for a while. Second, the additional Hong Kong ETFs have also been in place and had adequate volumes since about the middle of 2007. I should have done this a long time ago.

How much has the use of active fund managers cost me? As a group the funds have shown positive returns and those returns have been materially better than bank deposits. However, the combination of front end load and high management fees has probably resulted in returns about 2.0 - 2.5% per annum less than I would have obtained using passive index funds. Painful to admit.