The Best of Both Worlds
Welcome to the 16th edition of the BKI Quarterly Report, prepared by Contact Asset Management. Typically, we use these reports to share our thoughts on topical issues that are front of mind for many of our fellow BKI Investment Company (BKI) shareholders. This report and previous issues are available on the BKI website (http://bkilimited.com.au). Please subscribe online to receive these reports, as well as other news and information relevant to BKI shareholders.
This report looks at the Active versus Passive investing debate. It is an issue with a number of moving parts and interest groups. Exchange Traded Funds (ETF) are growing in popularity- partly due to their low cost structure but also due to the instant diversification and transparency they provide. In this report, we explain how a Listed Investment Company (LIC) such as BKI compares to both an ETF and traditional managed funds. As always, we try to take a balanced view -on a topic that is causing a fair bit of angst on opposing sides.
However, on this occasion our aim is to highlight the benefit of a low cost, closed-end vehicle that is actively managed by an investment team that are aligned with shareholders. BKI is actively managed and low cost, and therein lies its advantage. This is a rare combination in the Australian funds management industry, which are typically active and expensive or passive and cheap. We believe that BKI offers investors the best of both worlds.
Nevertheless, we do note that the active versus passive management argument does not have to be an either/or choice for investors. There is merit in combining the two in order to effectively diversify a portfolio.
What this report does highlight, and we hope will be an important takeaway for readers, is the importance of fees. BKI is managed by Contact Asset Management for 0.10% – among the lowest rates in the Australian market. The total cost to-run BKI (referred to as the Management Expense Ratio) is 0.15%. Thomson Reuters Lipper pegs the average expense ratio at 1.40% for an actively managed equity fund, compared to 0.60% for the average passive equity fund.
Importantly, low cost has not meant low quality or low return. Over the 10 years to 31 August 2017, the return for BKI shareholders beat the market (S&P/ASX300 Accumulation Index) by 2.9% per annum. To put that in perspective, $1 invested into the market index ten years ago would now be worth $1.41. The same $1 invested into BKI would be worth $1.86. Not bad considering that ten years ago, you would have put your money into the market just before the Global Financial Crisis hit!