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Take fresh look at your fund manager and value added

Thursday, March 14, 2024 — updated on August 23, 2024 - 3 min read

You should consider how much you are paying for fund management services and returns. PHOTO | SHUTTERSTOCK

By Rufus Mwanyasi

Managing Director

Canaan Capital Limited

Thank you for reading businessdailyafrica.com

Borrowed: If God had given Moses a boombox and CDs to inspire the Jews on their exodus out of Egypt, the score would have been their anthem. Their rushed footsteps were in sync with the beat: “left, right, left right, left right, left, right (It’s time I settle the score)”. No doubt one of the HipHop albums.

One of the album’s instant classics, How many Mics, had a very interesting start line by Pras: “Too many MC’s, not enough Mics. Exit your show like I exit the turnpike.”

The line still lives rent-free in my head and it got me thinking: what do they say about too many cooks? Some research found that the answer can be said of fund managers; there are too many of them and not enough value-add. In other words, you don’t do any better than an index (aka the NSE 20 Share Index) but you pay more for the privilege; the average manager's fee for a mutual fund is two percent.

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At the risk of sounding like a broken record, let me repeat: most active managers continue to destroy value and line their pockets with your money.

And blame the underperformance on two culprits. One is higher fees, and the other is due to incompetence (bad stock picking). But this is nothing new. Their results have been more or less the same every year. Ask SPIVA.

But I must admit we do have some outstanding local fund managers (a small minority though) doing a great job. But for the most part, the industry looks more like an asset-gathering machine as opposed to a return-driven one. To date, total assets are pushing above Sh161 billion assets under management, up from just Sh100 billion a few years ago.

So, I get the counter that you’re paying for diversification. Put differently: you’re “small money” and cannot get that spread without us.

Fair point. But if this is the case, then low-cost passive index funds would have been the answer. For as long as this status quo, I’ll still question why money market funds charge a full two percent with very little additionality or why an underperforming equity fund would still keep a whopping 2.5 percent.

Like night follows day, your returns will most certainly be mediocre, at best, with such unreasonably high fees.

You see, with the power of compounding, even a small difference in annual returns add up to big differences in wealth and incomes over many years. That's what investors need to consider.

In fact, just like shopping around for the best price on any other product or service, you should consider how much you are paying for fund management services.

Try to negotiate. However, to the extent you decide to move to a new fund house, you should think about any fees for closing or transferring your account, for example, if you have to sell some or all of your current holdings in order to transfer. Then try to follow up. If you think the fees are high.

Ask questions and consider following up in writing if you are not satisfied. Review statements to be sure you’re being charged correctly and ask the fund to break the fees down for you if it’s unclear.

Mwanyasi is MD, Canaan Capital.

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