The age-old issue of active versus passive management was resurrected earlier this month with new research from Cass Business School strongly suggesting active management is not worth its fees.
Findings from a 10-year study by the Pensions Institute at Cass Business School reveals almost all active fund managers fail to outperform the market once fees are deducted from returns.
The analysis of the monthly returns of 516 open-ended UK domestic equity mutual funds reveals an average annual post-fee loss of -1.44 per cent, with 99 per cent of all equity mutual fund managers “unable to deliver outperformance from stock selection or market timing”.
It adds that the remaining 1 per cent of ‘star’ managers is able to generate superior performance, although these managers “extract all of this for themselves via fees, leaving nothing for investors”.
Professor David Blake, director of the Pensions Institute, says: “This suggests that a typical investor would be almost 1.44 per cent a year better off by switching to a low-cost passive UK equity tracker.”
It is the latest salvo fired in the debate on active versus passive, and whether investors actually get what they pay for.
A quick search of the IMA sectors for funds with ‘tracker’ or ‘index’ in the title reveal approximately 118 vehicles, with the majority of them, 34, sitting in the IMA UK All Companies sector.
These passive vehicles include index trackers following the FTSE 100, FTSE All-Share and FTSE 350 indices, as well as ethical benchmarks, highlighting the wide variety of choice available for investors looking to travel down the passive route.
The best performing of these passive funds in the IMA UK All Companies sector is the £215m BlackRock Mid Cap UK Equity Tracker fund, which closely tracks the FTSE 250 index, with a 12-month return to June 17 of 14.42 per cent. This is almost 2 percentage points ahead of the IMA UK All Companies sector average of 12.7 per cent, but it is roughly half the return of the best performing non-tracker fund in the sector. The MFM Slater Growth fund has delivered a 12-month return of 36.08 per cent.
In fact, of the top-10 best performing funds in the IMA UK All Companies sector for the year to June 17, not one is a tracker or passively managed vehicle. While the BlackRock Mid Cap UK Equity Tracker remains in the top quartile of the sector, in absolute terms it slips to 68th place.
The disparity between the performance of active and passive funds in the past 12 months is repeated in the other main equity sectors.
Of the eight tracker funds in the IMA Europe ex UK sector, the top performer across one year is the £70.9m M&G European Index Tracker, which tracks the performance of the FTSE World Europe ex UK index, with a return of 15.47 per cent. But once again, while it outperforms the sector average of 13.55 per cent, it is roughly half the return of the 31.7 per cent from the Schroder European Alpha Income fund, which tops the sector for the 12 months.
Even in the IMA North America sector, which is often cited as an example of where it is difficult to outperform with an active manager because it is such an efficient market, the pattern is repeated. The best performing tracker fund is the Royal London US Tracker with a return of 12.3 per cent compared with the sector average of 11.32 per cent and 29.14 per cent from the top-ranked New Capital US Growth fund, according to FE Analytics.
Of course, a 12-month period can be argued to be too short a time frame to gauge the performance of tracker funds – but, then again, if you are buying a tracker is outperformance what you’re really looking for?
Consistency is normally the watchword for those taking a passive approach, or for adding a passive element to a portfolio, and the figures certainly bear this out.
For the 34 UK tracker funds the range of returns for the 12 months is remarkably narrow – from 14.42 per cent at the top to 8.35 per cent at the bottom – while for the sector as a whole the range widens, from 36.08 per cent at the top of the list to just 2.15 per cent at the bottom.
The consistency is even stronger in the US trackers, ranging from 12.3 per cent to 10.85 per cent, compared to the sector range of returns from 29.14 per cent to 5.01 per cent.
While tracker funds may not produce the stellar ‘shoot the lights out’ performance of their active counterparts, that is not what most people buy them for.
Nyree Stewart is features editor at Investment Adviser
CASS BUSINESS SCHOOL STUDY: KEY FINDINGS
The recent study published by the Pensions Institute at Cass Business School – New Evidence on Mutual Fund Performance: A Comparison of Alternative Bootstrap Methods – arrived at the following conclusion:
“The results prove that the vast majority of fund managers in our dataset were not simply unlucky, they were genuinely unskilled. However, a small group of ‘star’ fund managers are genuinely skilled and hence able to generate superior performance (in excess of operating and trading costs), but they extract the whole of this superior performance for themselves via their fees, leaving nothing for investors.
“Our final conclusion is that, while ‘star’ fund managers do exist, all the empirical evidence – including that presented here – indicates that they are incredibly hard to identify. For most investors, our results show that it is simply not worth paying the vast majority of fund managers to actively manage their assets.”
