"Can active managers deliver?" is an age-old question, but the answer doesn't get any more palatable. Over the last decade, the average actively managed fund has considerably underperformed its benchmark index, meaning investors would have been better off in much cheaper passive funds.
Wealth manager AWD Chase de Vere compared the performance of active funds in the UK All Companies, UK Smaller Companies, Europe, Global Emerging Markets, Asia Pacific (ex Japan), North America and Japan fund sectors, with their relevant benchmark indices.
The analysis revealed that in every investment sector with the exception of UK Smaller Companies, the average fund underperformed the benchmark index, in some instances by a wide margin. In every sector there were individual years - sometimes multiple years - where the benchmark index outperformed the sector average.
While the results suggest that many investors would have been better off with passive funds, AWD Chase de Vere argues that it is still possible for some actively managed funds to consistently outperform.
Part of the research also compared sector performance with an individual fund in the sector. The fund chosen was not necessarily the top performer in the sector but a long established, significant and well regarded fund that has been used by the wealth manager in client portfolios for a number of years. As the table below shows, in all sectors the selected fund outperfomed both the index and the sector average over the 10-year period.
"There are a select number of actively managed funds that can demonstrate consistent outperformance of the benchmark index and the sector average. The challenge for investors is to find these funds," says Patrick Connolly of AWD Chase de Vere. He adds that investors place too much emphasis on short-term performance figures and 'flavour of the month' investment sectors when selecting funds, often investing just as performance peaks.
AWD Chase de Vere predicts that from 2013 (when changes to financial advice come into effect), actively managed funds will need to clearly demonstrate they can outperform in order to justify their higher charges, otherwise they will find investors heading for the exit door. This should in turn lead to more passive offerings and investment companies reducing the number of actively managed funds they run and reducing charges on those they retain.
10-year fund performance (to end-2011)
| Sector | Sector average | Selected fund | Index |
|---|---|---|---|
| UK All Companies | 50% | 127% | 61.7% |
| UK Smaller Companies | 95% | 244% | 11.7% |
| Europe | 48.3% | 124% | 56.3% |
| Global Emerging Markets | 213% | 271% | 263% |
| Asia Pacific (ex Japan) | 174% | 215% | 207% |
| North America | 9.9% | 28.3% | 16.3% |
| Japan | 16.6% | 38.1% | 27.7% |
Source: AWD Chase de Vere
