Saturday 17 November 2018

Actively-managed funds shown to underperform

Lack of performance a global issue for investors in actively-managed equity funds. Photo: Bloomberg
Lack of performance a global issue for investors in actively-managed equity funds. Photo: Bloomberg

Charlie Weston Personal Finance Editor

MOST actively-managed investment funds have failed to beat the benchmark over the last decade, a new report has found.

An in-depth study by S&P Dow Jones Indices found that 86pc of actively-managed equity funds in Europe failed to beat the benchmark index over the last 10 years.

The funds invested in global, emerging and US markets.

Findings from the research raise questions about the value that stock-picking managers add, and the fees they charge.

It comes as active fund managers have come under repeated attack from academics and consumer groups for charging high fees for poor performance.

The study also found that 100pc of actively managed equity funds sold in the Netherlands have failed to beat their benchmark over the past five years, the 'Financial Times' reported.

Ninety-five per cent of funds sold in Switzerland, and 88pc of those on offer in Denmark, also underperformed.

Active management is the use of individuals to actively manage a fund's portfolio.

They rely on analytical research, forecasts, and their own judgment and experience in making investment decisions on what securities to buy, hold and sell.

In contrast, index funds try to track the performance of a particular market benchmark, or index, as closely as possible.

They tend to have lower expense ratios than actively managed funds because they generally trade less frequently.

The director of research at S&P Dow Jones Indices, Daniel Ung, said: "The 100pc figure is very shocking. The other statistics are not much better.

"We are not saying active management is dead, but active managers need to justify what they are doing."

Overall in Europe, four out of five active equity funds failed to beat their benchmark over the past five years, rising to 86pc over the past decade, according to S&P's analysis of the performance after fees of 25,000 active funds.

And the research found that 98.9pc of US equity funds underperformed over the past 10 years. It also found that 97pc of emerging market funds, and 97.8pc of global equity funds.

Dublin-based investment adviser Marc Westlake, whose PortfolioMetrix offers clients the options of investing in both passive and actively managed funds, said there was a need for active managers.

Without them there would be no way of knowing what the fair price of a share is every day.

Mr Westlake said research is expensive and therefore active investing tends to be more costly.

"But we all need the research in order to know what the fair price of any security is, the difference is that the passive investor receives the benefit of trading at the fair price which is set by the active investors but without incurring many of their costs," he said.

He said investors are attracted to the possibility of doing better than average even when it's a mathematical certainty that the average active investor must under-perform the average passive investor due to the difference in fees and expenses.

Irish Independent

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