According to research conducted by FE Trustnet, the average active UK growth fund has beaten an average, standard tracer fund over a period of one, three five and ten years. To say that this is astonishing is an understatement. Many market commenters have been reiterating the benefits of passive of active for some time now, and even market oracle, Warren Buffett has bet against actively managed hedge funds, making a $1 million bet with hedge-fund manager Protégé Partners that a simple stock-index fund would beat a handpicked selection of five hedge funds over a decade. Of course, hedge funds are not identical to actively managed trusts and funds as fees are usually higher and range of investments broader.
FE Trustnet summarizes that over the last ten years, the average UK All Companies fund has delivered 128%, while the average tracker has returned 105%. What’s even more worrying is the deviation of tracker returns from the mean. For example, the Halifax UK FTSE 100 Index Tracking fund returned 72% over the period, with a tracking error of 7.5%. Halifax’s FTSE All share tracker also significantly underperformed its benchmark, returning just under 90% compared to a benchmark return of 130%.
It would appear that the problem is fees. The investment community has been so driven on selling these products, boasting that they have such low fees and transparent structure, that many have missed the point. If a fund has fees, no matter what they are, it is not a true representation of the index. A fund with a TER of 1.5% per annum, will underperform the index by 1.5%, after fees are taken out. Compounded over a longer time frame this is bound to have an effect.
Personally, I would be prepared to pay extra for an actively managed fund with a chance of outperforming the market. Trackers have no chance of outperforming and will certainty underperform including fees.
Oh, and if you’re interested, according to Reuters and a study commissioned by KPMG, during the period 1994 to 2011, hedge funds delivered an annual return of 9.07%, compared to a 7.27% return from commodities, 7.18% from stocks and 6.25% from bonds.