Most Dollars & Sense articles are about how to invest well. This one is about how to do it poorly and pay for the experience.

It’s also about the thickness of the hide of the world’s biggest funds manager, BlackRock, when it comes to Australian investors unfortunate enough to have invested money with it.

BlackRock finished last year with US$8.6 trillion (that’s trillion with a ‘T’) under management. Call it $12.8 trillion in our money, that is more money than an individual can actually comprehend, about three times the total value of Australian superannuation funds, more than five times Australia’s GDP.

A lot of money in anyone’s currency, it was nonetheless down from the US$10 trillion (A$14.8 trillion) the year before, primarily reflecting the US market’s poor 2022.

It could have been worse – it could have had the performance of  BlackRock’s Australian Share Plus Fund.

Spectacularly dud management

Spectacularly dud management has meant $10,000 invested in the fund five years ago was worth $9709 at the end of January – and that’s after reinvesting dividends and ignoring any tax on those dividends.

That’s a cumulative total return of -2.9 per cent – which compares with BlackRock’s management charging the hapless investors 1 per cent every year for failing at their job – so BlackRock picked up roughly $5000 while the investor lost $291.

The joke here is that BlackRock declares “the fund aims to deliver returns that are 4 to 6 per cent (before fees) per annum above those of the S&P/ASX 300 Industrials Accumulation Index … over rolling three-year periods”.

Instead of BlackRock outperforming, the benchmark it was supposed to beat rose 33 per cent – the $10,000 turned into $13,260 after five years.

Over the past dozen years the benchmark has outperformed the BlackRock fund managers by more than 40 per cent – but each year BlackRock has collected 1 per cent of investors’ money for its failure.

Another BlackRock fund, the plain Australian Share Fund, has actually done worse, going backwards by 4.3 per cent over the past five years.

What distinguishes the Share Fund Plus though, is that it is nearly four decades old and it has only managed to significantly outperform its benchmark in about one of those 40 years.

Fund kept alive by mugs reinvesting

BlackRock acquired the funds along the path of local fund management mergers and acquisitions. For most of the fund’s history, it was happy to nearly hug the index and charge those fees for the privilege.

What I meant earlier by wondering about the thickness of the BlackRock hide is that the fund is closed to new investors but BlackRock happily keeps taking the coin for failing, the fund kept alive by mugs reinvesting any dividends either because they’ve forgotten they are in it or in the hope that maybe the losing stock pickers might finally get lucky.

The reality is that throwing darts at the stock market pages would have done better and certainly cost less.

Given the extent of BlackRock’s vast wealth and its appalling record with Australian shares, a company with less gall would be embarrassed to charge fees for what it has done to its clients.

The irony is that this market behemoth has just launched a price war in the Australian ETF (exchange traded fund) market by cutting the annual management fee on its iShares S&P/ASX200 ETF from 0.09 per cent to 0.05 per cent.

Yes, fees to invest in the benchmark guaranteed to outperform the BlackRock funds managers are 1/20 of what it charges its poor managed funds patsies.

Throwing darts at stock market pages would work better and cost less. Photo: Getty

The price cut was provoked by BlackRock’s iShares product dropping from second to third place, overtaken by BetaShares’s Australia 200 ETF. Betashares in turn has reacted by cutting its management fee from 0.7 to just 0.04 per cent.

The Australian market leader, the mutually-owned Vanguard, is still charging 0.1 per cent for its Australian Shares Index ETF. The Financial Times reports Vanguard’s local flagship fund has $12.7 billion in assets – more than twice the size of the next biggest.

Passive index funds – whether ETFs or traditional – waste no money on stock pickers who mostly fail to beat the market after fees, over time. And history says the funds managers who do beat the market for a while more often than not revert to the mean.

Most funds managers are not game to stray far from the index with their stock picking anyway, as they don’t want to run the risk of becoming an embarrassing joke like BlackRock’s Australian operation.

Vanguard from its early days as a mutual funds manager championed passive investment. As long as financial advisers and brokers were paid commission for putting people into funds, it was an uphill battle, yet those very commissions and other fees ensured the index beat the active managers most of the time.

Shift to passive funds

Individual Americans started to wake up to the cost of high fees and, as secret commissions fell away, low-fee passive funds began their massive run.

Now the Financial Times reports ISS Market Intelligence is forecasting index funds will control the majority of long-term invested US assets by the end of 2027.

“Active funds’ share of the US market will fall from 53 per cent in 2022 to 44 per cent in five years,” the research group estimates.

“Most of the market share will go to index exchange traded funds, which are expected to garner $US2 trillion in new sales. Active mutual funds, meanwhile, will bear the brunt of outflows, according to the report, with an estimated $US1.4 trillion in net redemptions expected over the next five years.”

Last year alone saw $US1 trillion in net outflows from US active mutual funds while passive mutual funds had $US53.8 billion in net inflows. Admittedly 2022 was far from “normal” as harder times make people look harder at what their money is doing and how much it is costing.

Australia lags the US trend, but we are on the way. The big fees and fat salaries that were the norm for active funds managers are not sustainable and will eventually go the way of video stores and the milkman.

BlackRock’s iShares business is riding that trend, but the company is shamelessly hanging on to the dodo’s unjustifiable fees while it can.

Disclosure: Relatives of mine unfortunately inherited one of the dud BlackRock funds, dating from its previous management, hence my interest in looking around the bottom of the funds management barrel for a change.