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Dog days for fund managers

January 29, 2013
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Hardly a week goes by without more reports detailing quite how hopeless UK fund managers are at managing our investments. Last weekend’s money sections featured so many such stories that surely readers must be starting to question the wisdom of paying so-called ‘experts’ exorbitant charges to buy and sell shares on their behalf.

Once again, the papers had a field day with "The guide that fund managers would love to ban", the annual “Spot the Dog” report by BestInvest (link to free download). The report identifies 153 funds with £23bn under management that have underperformed the market in each of the last three years, while charging investors around £1bn in fees. Scottish Widows, Baillie Gifford, F&C Investments and Jupiter are named among the worst offenders. 

To make matters worse, if you were counting on the recent market rally to put a spring back in the step of your investments, there was more bad news in the Sunday Times. The FTSE is up around 6.5% since 2nd January - its second-best start to a year since the index was founded in 1984. It’s almost 20% higher than it was when markets bottomed in June last year. Yet in that time, according to Morningstar, 54% of funds in the UK All Companies sector have underperformed their benchmark index. 

Sunday Times journalist Ali Hussain goes on to say that, “experts argue that investors could be better off in passive funds (which) carry fees of about 0.3% compared with 1.5% for active managers over a year.” 

The article suggests that passive funds are indeed a better option for investors in mature markets such as the UK, Europe and the United States, but that active managers really do add value in emerging markets. It’s an argument you often hear from active fund managers, but as anyone who saw our latest video blog will know, the figures tell a different story - especially over the longer term. 

Recent research by AWD Chase de Vere demonstrates that fund managers running emerging market and Japan funds have an even worse record than those managing UK and US funds. 

Over ten years, after charges, the study showed that the average fund in the UK All Companies sector delivered 123%. That compares with a rise of 132% in the FTSE All Share Index – an underperformance of 9 percentage points. In the US, the average actively managed fund underperformed by 11 percentage points. In Europe the figure was 16. 

However, in Asian equities, the average active fund underperformed the index by 45 points. In the emerging markets sector, the difference was a staggering 68 percentage points. 

It’s true that several actively managed funds have managed to beat emerging market indices in recent months, but over a significant length of time, the figures just don’t stack up. 

Of course, the problem that investors who persist with active fund managers have is identifying which manager is going to beat the market consistently over the next few years. Past performance is never a reliable guide, and one investor’s star fund manager is another’s flop; Anthony Bolton’s underperformance in China, for example, has left some commentators wondering whether he’s lost his magic touch. 

The fact is, you’re just as likely to pick a loser as you are a winner. If, for example, three years ago, you’d put your faith in Jupiter’s China Fund, you would have lost 2.6% compared with an average market return in that sector of 12.7%. 

Whichever way the fund management industry tries to dress the figures up, there’s no disguising that, time and again, overpriced and overhyped actively managed funds are being consistently outperformed by the humble tracker.

Image courtesy of oldsamovar

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