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This commentary is written by Vanguard Head of Market Strategy and Communications Robin Bowerman. The title is Why a core-satellite approach makes sense

It was first published on 24 June 2013

And is read by Michael Mullins

Please remember that advice in this podcast represents a general view. It is recommended that you seek specific financial advice, before making investment decisions.

Many investors take a core-satellite approach to investing in shares because they recognise that it is extremely difficult for actively-managed share funds to consistently outperform the market.

Such investors typically hold the core of their share portfolio in low-cost Exchanged Traded Funds (ETFs) or traditional index funds tracking broad share market indices such as the S&P/ASX 300 index.

These investors then tend to have much-smaller satellites of direct shares and perhaps some actively-managed funds including those specialising in small companies.

Research has repeatedly shown that most actively-managed share funds struggle to even match market returns once their fees are taken into account.

And trying to pick future winners from the hundreds of actively-managed share funds is an extremely difficult task.

Smart Investing recently discussed extensive Vanguard research in Australia and the US that demonstrated once again how a fund manager’s past performance is not an accurate guide to a manager’s future performance.

Recent research from investment researcher Morningstar shows that:

1 309 (or 62.8 percent) of 492 actively-managed, large-cap Australian share funds did as well or outperformed the S&P/ASX 300 Accumulation Index in the 12 months to May 31.

2 Only 164 (or 37.52 percent) of 437 actively-managed, large-cap Australian share funds did as well or outperformed the S&P/ASX 300 Accumulation Index over the three years to May.

3 Only 209 (or 54.56 percent) of 383 actively-managed, large-cap Australian share funds did as well or outperformed the S&P/ASX 300 Accumulation Index over the five years to May.

4 Only 96 (or 41.37 percent) of 232 actively-managed, large-cap Australian share funds did as well or outperformed the S&P/ASX300 Accumulation Index over the 10 years to May.

Significantly, Morningstar measured the funds’ returns in after-fee terms.

The higher fees charged by actively-managed funds really inhibits their ability to at least match the index.

And that concludes the column

Why a core-satellite approach makes sense

from Robin Bowerman, Head of Market Strategy and Communications at index fund manager Vanguard Investments Australia

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Please remember that advice in this podcast represents a general view. It is recommended that you seek specific financial advice, before making investment decisions.