Investors will be worse off by investing in high-cost closet-tracking funds, because alpha is rare in investment management, Gina Miller has said.
The head of the campaign group True and Fair and co-founder of fund manager SCM Private, said too many supposedly actively managed funds were doing little more than following the index.
However, she explained that, while active managers aim to seek alpha – a measure which shows performance on a risk-adjusted basis – too often, they simply do not achieve this as it is too difficult to go beyond what the market is doing.
Ms Miller said: “Due to its zero-sum nature, it is unrealistic to expect alpha to be produced by the industry as a whole. It is also becoming increasingly difficult for managers because of information efficiency and competition.”
She said that funds were aggressively marketed as ‘being different’, but as assets under management increase because of inflows, managers have become inclined to take less risk and to differ less from the index for fear of losing their AUM.
“The problem for investors is knowing how to judge what they are invested in and if they were paying a fair fee,” she added.
True and Fair has called for firms to publish the fund’s holdings online, at least quarterly, and for factsheets to list active share along with a total cost of investing number, so investors can best judge the balance between cost, risk and return.
Meanwhile, Dan Attwood, proposition manager of retail index funds at LGIM, said there has been a growing demand for index funds as investors look for ways to protect their client’s portfolios in turbulent market conditions.
He said: “What is driving growth of index funds are the benefits for an investment strategy, they allow flexibility – they are easy to change allocation and exposure. They provide simplicity and market return, peace of mind that it will perform, and of course low cost.”
The comments came as research revealed that the number of closet trackers, which charge active fees but mimic a benchmark, has more than doubled over the past 12 months, from eight to 17 funds.
According to data from the Investment Association, index funds account for £103bn in AUM and represent 10.5 per cent of the retail fund market.
Matthew Bird, investment adviser at Gwent-based Seer Green Financial Planning, said: “The average fund should match a tracker but it charges more than a tracker, so in the long run investors will do worse by virtue of the high fees.”