This is because the Financial Conduct Authority has launched an inquiry into the fund management industry which might conclude that it has consistently charged investors too much for mediocre performance. This, says Andrew Lilico of Europe Economics, is "nothing less than a ticking time-bomb" because it might expose the industry to a wave of claims that it has mis-sold actively managed funds by "deceiving investors" into buying high-charging, poor performing funds.
A recent paper by David Blake of Cass Business School and colleagues shows the scale of the problem. They studied the performance of UK unit trusts between 1998 and 2008 and concluded: "the vast majority of fund managers in our data set were not simply unlucky, they were genuinely unskilled." They estimate that a typical investor would have been 1.4 percentage points a year better off in a low-cost tracker fund. This corroborates other evidence. Vanguard's Peter Westaway has found that "active fund managers as a group have underperformed their benchmarks". And researchers at Rice University have found a similar thing in the US. "We find little evidence that active funds outperform passive funds", they say, adding that risk-averse investors should prefer trackers because they offer less chance than active funds of badly underperforming the market.