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Do investors receive value for their fund fees?

Some of the most expensive funds available to Hong Kong investors deliver less than stellar returns.

Morningstar research has pointed to a correlation between high fees and substandard performance of mutual funds.

The research firm found that firms with high fees are unlikely to offer above-average performance and low-fee funds give investors the best chance of success over the long term.

FSA decided to have a general look at funds available for sale in Hong Kong to make a check on fees versus performance.

The starting point was international equity funds, the biggest sector in the Hong Kong fund universe, with 131 funds available for sale and the total AUM surpassing HK$650bn ($84bn).

International equity actively-managed mutual funds available to investors in Hong Kong charge on average 1.56% in annual fees, according to FE. Some as low as 0.75%, some as high as 2.75%. 

The two most expensive funds in the sector are Blackrock’s GF Global Equity Income Fund and GF Global Enhanced Equity Yield Fund.

Over the last three years ending 28 February, both underperformed their benchmark, delivering a relative annual return of -1.3% and -0.59%, according to data from FE. (For funds where the benchmark is not specified, the sector average is used as the reference).

Asia-Pacific ex-Japan

The second most populated sector is Asia-Pacific ex-Japan (120 funds) with around HK$440bn ($57bn) in assets.

In this sector, the Allianz Little Dragons Fund charges fees of 3.25%. However, this fund outperformed its index during the trailing three years by 2.45%. 

The investor is right to question the value, however, especially if one notes that HSBC GIF Asia Ex Japan Equity Smaller Companies Fund (in the same sector) delivered 8.46% of outperformance, while charging only 1.50%, essentially standard in the sector.

International mixed asset

In this sector, the third largest with 118 products and HK$640bn ($83bn) in assets, two Blackrock funds are tied for the most expensive. Both charge 2.75%.

The Blackrock GF Global Multi-Asset Income Fund delivered only 0.71% more than the sector average (the fund does not specify a benchmark). The BlackRock GF Flexible Multi Asset Fund underperformed its benchmark (50% MSCI World and 50% Citi WGBI) by 5.94%.

Also in this sector, the poorest performer over the specified three-year period had a high fee of 2.45% — the Morgan Stanley Diversified Alpha Plus Fund. It recorded a 16.44% underperformance.

While it is difficult to draw firm conclusions from this cursory look, the data seems to track with Morningstar’s position that high fees are correlated with sub-standard performance.

All calculations are based on FE data, for funds that are available for sale in Hong Kong with at least three years of performance record. Relative return calculations negate the effect of currency moves. 

Part of the Mark Allen Group.