Managed funds have been losing ground to low-cost options, said one asset manager, leaving the sector with the difficult task of convincing investors looking for absolute return, that funds are a good idea.

Speaking at the Self Managed Super Fund Professionals' Association of Australia yesterday, Dominic McCormick, Chief Investment Officer at Select said managed funds had failed to appeal due to issues of control, transparency and trust in addition to higher fees in the current return environment.

Despite $113 billion in cash in the SMSF structure as at May 2011 and excess cash of $39 billion, only one in eight SMSF investors have plans to put money in managed funds, according to McCormick.

"To invest that extra cash, you need confidence in markets and the economy," he said. "The behaviour of investors is critical but the managed funds industry has done a poor job in addressing this."

Yet many SMSF portfolios carry too much equity risk he said, with a heavy skew to Australian equities.

While the Australian future fund carries just 10% of its portfolio in Australian equities, the allocation of the average SMSF is around 36%, McCormick said.

The high reliance on geared property is additionally something Australian investors tend to feel comfortable with, though despite the interesting tax arrangements it can allow, gearing can increase the chance of losing money in addition to the problem that a high level of dominance of one asset will result in a very large exposure, said McCormick.

Reduced flexibility, liquidity and diversification are the natural consequences.

The argument coming from the fund managers is that despite the higher costs, the vehicles provide an easy option for exposure to a variety of derivatives, allowing hedging and capitalisation on market inefficiencies and alpha.

"Passive management actually puts more risk in a portfolio because indices sometimes do stupid things," said McCormick.

The move by the ASX to bring some managed funds into the CHESS system however, was described by McCormick as a "gamechanger," which he says will make funds more accessible and may even pose a longer-term threat to platforms and administration arrangements.