Johannesburg — INVESTORS paid an average 8% "behaviour penalty" when switching out of poor-performing funds into better-performing funds at an inappropriate time, Nedgroup Investments head Nic Andrew said yesterday.

At a road show in Johannesburg he said that investors usually spent a disproportionate amount of time trying to identify the "best" fund manager or fund for every occasion.

The rewards of finding the best fund manager were clear as over the past 10 years the top quartile of South African equity fund managers outperformed the bottom quartile by 5% a year, a figure that compounded dramatically over the long term. However, it was difficult to find a fund manager in advance who performed well, and on top of that, investors usually found it hard to stick with their choice once the fund they chose went through a bad patch, he said.

A US survey that measured investor returns versus fund returns indicated that over 20 years, US fund investors outperformed the average fund by nearly 8% a year. The experience was likely to be the same in SA, said Andrew. "There is up to 8% per annum upside for teaching yourself to do nothing," he said.

RE:CM executive chairman Piet Viljoen said investors needed to pay close attention to costs. Many financial services companies used mathematical models based on assumptions that may or may not be true, to quantify risk in their models. This quantification of risk had led to a "feeding chain" of costs between the financial services provider and investor.

The growth of the financial services industry was due to these costs deducted from client returns.