They are inclined to accentuate the positive and understate the negative.
It is a bit like walking into one car dealer and asking for reasons why you should buy from another? Most people wouldn't expect too much in the way of unbiased advice.
The old Latin saying, "de omnibus dubitandum" (everything is to be doubted), comes to mind.
Let's examine some of the arguments for looking at returns instead of fees.
One clue as to their veracity is that if you look closely at the faces of the "concentrate on returns" camp you will notice that their noses have grown slightly larger after they have finished talking.
A popular argument is that the NZ stockmarket is a special case and even with higher fees many fund managers have historically been able to outperform here.
This argument however is disingenuous – whilst fund managers may or may not have outperformed in aggregate, the performance of active funds is highly variable and whilst some have outperformed many have not.
Indeed those that do outperform frequently go on to underperform.
Kiwisaver is a big decision for investors and betting on one manager is a risky proposition.
Unfortunately the way Kiwisaver is structured you can only invest with one KiwiSaver provider and most often that means investing with just one fund manager. The US equivalent of KiwiSaver is much more well thought out in that you can invest with a range of providers.
The other important takeaway for retail investors is that even if NZ's fund managers had outperformed locally it's not a huge issue because NZ shares should only be about 10 per cent of a balanced portfolio.
Kiwisaver is a big decision and betting on one manager is a risky proposition.
Research from the S&P Indices Versus Active (SPIVA) study highlights the fact that in virtually all other asset classes including bonds and overseas equities most fund managers underperform the benchmark.
Secondly, the NZ data is historic and as markets get more efficient outperforming becomes more difficult and cost more relevant.
Scaremongering is also used to put investors off focussing on cost.
Some experts would like the public to think that low-cost funds pose a systemic risk to the market and ask "what would happen if the market took a dive and the index tracking ETF's all have to sell at once?"
If the market took a dive why would those investors be any more likely to sell than anyone else? There is no rhyme or reason to that argument and remember it's the investor who makes the decision to sell not the fund manager or a computer.
Probably the most common fallacy expounded by the proponents of the "returns are more important than fees camp" is that the high-cost options are able to provide downside protection when markets fall.
Let's think about this fantasy for a minute. The argument here is that somehow the portfolio manager will know when the market is going to fall and will have moved to cash before the fall.
That is obviously ridiculous and research by Vanguard, covered by this column some years back, showed that funds fall as much as the market does in a downturn.
It's when the "focus on returns" apologists start quoting "facts" that they often get into trouble.
As is the case with many falsehoods the key to understanding them is to "follow the money".
Low-cost investing represents a huge threat to the fund management industry simply because it offers fund management at a fraction of the cost and no incumbents like a low-cost competitor.
Many experts like to say "you get what you pay for and if you pay low fees expect underperformance".
Reality is that the opposite is true.
Debbie Harrison of the Pensions Institute at the Cass Business School was quoted in the Financial Times as saying "there is little academic evidence to support the argument that asset management and the potential for outperformance is more important than cost".
So if you are contemplating investing in KiwiSaver should you focus on fees or returns?
The NZ Super Fund looks at both but it does it in a clever way. Its objective is to produce high returns with reasonable risk and it does so by overweighting shares which have historically produced great returns.
It focuses on fees too and thus 87 per cent of its share portfolio is invested in the low-cost funds that the local experts say are not a great deal. Last year the Super Fund's management fees were under one tenth of 1 per cent.
Including some low-cost funds in your portfolio is sensible and simply reflects best practice around the world. There is room for all styles of fund management but if investors are to maximise their retirement outcomes they need to look at what expert institutions like the NZ Super Fund do and remember "de omnibus dubitandum".
Brent Sheather may have an interest in the companies discussed. A disclosure statement is available upon request.
