Wealth management consultancy service Asset Risk Consultants (Arc) has forecast a return to active managers beating passive funds in the next five years.
Guernsey-based Arc, which provides services for advisers looking to outsource to a discretionary manager, said a return to volatility in markets should lead to investors seeing the value in active management.
In its latest report, Arc has compared the performance of discretionary management portfolios to a hypothetical passive portfolio suggested by Warren Buffett.
In 2013, Mr Buffett had suggested in a letter to shareholders that a large number of investors might be better off abandoning active management and instead investing “10 per cent of the cash in short-term government bonds and 90 per cent in a very low-cost S&P 500 index”.
Analysis from Arc has shown that such a portfolio would have outperformed the majority of discretionary portfolios in the five years to the end of September 2014, substantially outperforming the average return from all four Arc multi-asset sectors, though with higher volatility.
In its commentary, Arc said the outperformance of the Buffett strategy in the past five years has been the result of the equity bull market, but warned investors should not presume that such a strategy would always outperform.
In fact, the same portfolio was shown to have underperformed every Arc sector in the five years to the end of September 2009; even the defensive Arc Cautious sector.
The returns from all of the Arc sectors were denominated in dollars to avoid the direct influence of currency on returns.
UK retail investors have been increasingly allocating to passive funds, with sales of tracker products propelling BlackRock to the top of recent fund sales tables. Meanwhile, IMA data shows a consistently high level of flows into passive funds.
Commenting on the outperformance of the Buffett portfolio, Arc pointed out that for the past few years the US equity market had been reaching all-new highs, although other equity markets were struggling, highlighting continental Europe and Japan as laggards.
The firm said discretionary managers would have had to have a large overweight position in US equities to outperform but many have instead “been seeking out value in Japanese and particularly European equity markets”.
Arc claimed the US equity bull market could be close to fading and said “the environment feels more like the five years to the end of September 2009 than the most recent five years of bull market conditions”.
The report said: “Advice from Buffett should never be ignored but it does need to be weighed.”
