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FTADVISER BLOG

Are active funds getting a bad name?

Research in this edition of Investment Adviser names and shames ‘closet trackers’.

By Jenny Lowe | Published May 21, 2012 | comments

As pressure mounts in the final countdown to the RDR’s implementation, Investment Adviser research calls into question the charging structures, investment objectives and sustainability of products being offered to investors.

After nearly a decade of scarce stockmarket returns, it isn’t surprising that active fund management has acquired something of a bad name.

The past decade has left hard-hit investors with little appreciation for any performance by active managers that may have been good in relative terms to a benchmark but was negative nonetheless – a manager’s defence that he lost only 10 per cent while the index fell by 15 per cent simply doesn’t wash.

In a market overrun with ugly ducklings, with the right research and due diligence, the occasional swan can be found

Jenny Lowe

The very idea of paying a premium investment fee to an active manager for negative performance is just plain galling. No wonder the IMA’s figures for Q1 2012 show that net retail sales of tracker funds are the highest on record, at £661m, since the IMA’s analysis of such figures began in 1992.

The transparency required by the RDR means clients are going to know exactly what they are paying for and how much it is going to cost them. Accordingly, investment cost is going to take on significantly higher significance for clients who will want to see results for the fund management charges, and in particular, the adviser charges which they are paying on top of the investment costs.

It has been argued by many that investors would be better off using a blindfold and a pin than trying to select an outperforming fund manager, and with more than 2,000 UK-registered funds to choose from, this may be partly true.

In the past two years, Investment Adviser’s Mid-Year Monitor report has uncovered as many as 38 potential ‘closet trackers’ – or supposedly actively managed funds that actually barely deviate from their benchmark indices.

With products from Henderson Global Investors, Franklin Templeton and Standard Life Investments (among others) making this year’s list, now is the time to re-evaluate client portfolios.

Recent research by independent data company Lipper shows that just 0.5 per cent of Europe’s active managers have outperformed their benchmark each year in the past 10 years.

But this is in an industry which, according to Lipper, sees 3,400 funds launched every year and 2,400 funds a year close or merge. The research also showed that the proportion of equity funds that outperformed their benchmarks over just one year varies between 26.7 per cent and 59.1 per cent in the past 20 years, with the lowest figure seen during 2011.

Advisers are going to find it increasingly difficult to justify clients’ charges for portfolios of actively managed funds which require constant adjustment because on average only four funds in 10 will beat the benchmark this year.

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Hal Austin

Hal is editor of Financial Adviser and has been for more than a decade. He has previously worked on a number of local and national publications.

Ashley Wassall

Ashley is editor of FTAdviser and writes on all areas of retail finance. Previously supplements editor at Money Management and editor of a European private equity publication.

John Kenchington

John is editor of Investment Adviser and has written about investments for several years. He has worked at titles including City AM and was recently named in the MHP 30 To Watch list of up-and-coming media names.

Jon Cudby

Jon is editor of Money Management and has 12 years' experience covering retail personal finance. In 2005, Jon was launch editor of FTAdviser and most recently he was head of online content for Incisive Media's financial services titles.

Tony Hazell

Tony is a freelance financial journalist, having been editor of Money Mail at the Daily Mail for a number of years. He has been writing a column in Financial Adviser since 2005.

John Lappin

John is a weekly contributor to Investment Adviser with 15 years’ experience in financial journalism and 10 years writing on the IFA sector. He was formerly editor of an IFA trade magazine.

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