The lack of homogeneity means investors are not getting the full experience out of objective-based investments, but the jury is still out on whether they will achieve their objectives, according to Morningstar.
Morningstar’s objective-based investing report found objective-based funds had widely differing asset class exposures, and while some funds were hitting on objectives, the experience of a typical investor of some of those funds had not.
Morningstar’s Australasia director of manager research, Tim Murphy, said overall investor experience with these objective-based funds had to date been worse than reported total returns.
“We’ve sort of concluded that objective based funds aren’t a good way about going in general but I think the jury is still out there about what outcomes are being delivered out there and what is being achieved, and you’re seeing a steady pattern there between risk and return,” he said.
In a sample of 10 funds that had similar objectives, in terms of five-year returns, Perpetual diversified real return fund hit returns in the seven to 7.5 per cent range, but the typical dollar was more at the three to 3.5 per cent.
This was similar to Schroder Real return CPI +5 per cent fund that had returns of around six per cent but had dollar returns of just below four per cent.
“It’s a small sample set and it’s early days, you’re already seeing evidence of more complex strategies and certainly differences in asset allocation and people therefore are not already getting the full experience out of them,” Murphy said.
“Part of that is that it is a newer area that people are only starting to get confidence in in the last couple of years and that has coincided with where those returns have come from.”
Murphy noted that typically the bigger the behaviour gap the more volatile the types of investment.
“Typically the narrower gaps you see tend to be in multi-sector balance type funds which we largely put down to the fact that most of those dollars tend to be part of regular superannuation funds,” he said.
“The important thing to highlight is the lack of homogeneity in approaches here is important and raises the hurdle of due diligence required before considering investing.”
