Managed accounts and the return gap

When we start talking to clients about introducing managed accounts into their practices, one of the things that we begin with is that, on average, investors in managed accounts should experience higher returns than investors in manually managed portfolios.

We have performed detailed analysis of the returns to investors across the risk profiles in an advice business over a decade, and found that investors who were closest to the model portfolio enjoyed returns that were 0.82% higher than those that were furthest from the models. And they got those returns with lower risk.

Morningstar periodically release comparisons of fund returns and the the average returns to investors in those funds. They find that, even in diversified fund, the average investor gets 0.75% to 0.80% less than the return of the fund itself. The gap is worse for single asset class funds. Put simply, investors tend to buy high and sell low. They’ve done this analysis multiple times since 2010, with quite consistent results.

Now Philo Capital have released a study on fairness in rebalancing, where they simulate the returns of portfolios that are rebalanced at different weeks in the year. They find that most of the time the difference in portfolio returns is over 0.50%, and a third of the time it’s over 1%. Eyeballing their chart below, it seems like the median difference is around 0.80%.

So we’d say that there’s good evidence that by simply managing an investor’s portfolio in a timely way using a disciplined approach the investor will be about 0.80% better off, with more consistent returns and lower risk.

Important Information: This document has been prepared by Aequitas Investment Partners ABN 92 644 165 266 (“Aequitas”, “our”, “we”), a Corporate Authorised Representative (no. 1284389) of C2 Financial Services, (Australian Financial Services Licensee no. 502171), and is for distribution within Australia to wholesale clients and financial advisers only.

This document is based on information available at the time of publishing, information which we believe is correct and any opinions, conclusions or forecasts are reasonably held or made as at the time of its compilation, but no warranty is made as to its accuracy, reliability or completeness. To the extent permitted by law, neither Aequitas nor any of its affiliates accept liability to any person for loss or damage arising from the use of the information herein.

Please note that past performance is not a reliable indicator of future performance.

General Advice Warning: This document has been prepared without taking into account your objectives, financial situation or needs, and therefore you should consider its appropriateness, having regard to your objectives, financial situation and needs. Before making any decision about whether to acquire a financial product, you should obtain and read the relevant Product Disclosure Statement (PDS) or Investor Directed Portfolio Service Guide (IDPS Guide) and consider talking to a financial adviser.

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