By ADRIAN LOWCOCK 25/06/2009
Last year, many pundits and market commentators were all too ready to announce that active managers have had their day in the sun and the future was all about tracker funds. In the Spring issue of Bestinvestor, we discussed whether active management still had a role to play for investors. In summary, active managers tend to outperform when economic conditions are more benign and volatility has been low.
The last two years have not been benign for active managers as conditions were set for passive managers to outperform. Little has changed in 2009 to suggest active managers should be able to add value. However, over the last five years active managers have, on average, outperformed their tracker peer groups across a range of different equity sectors. The table below shows the average returns for active managers’ versus tracker funds. Active managers have beaten the passive tracker funds and that’s after costs have been taken into account.
| Sector | 5 year returns Active | 5 year returns Tracker |
| IMA Global Growth | £123.81 | £112.68 |
| IMA North America | £103.23 | £96.66 |
| IMA UK All Companies | £117.07 | £115.52 |
Source: Lipper hindsight/bestinvest, data to 29th May 2009, dividends reinvested. Figures based on £100 invested as at 29th May 2004. Past Performance is not a guide to the future.
Global Growth Sector
There are 135 retail funds that have a track record going back five years; only two of these are tracker funds. Performance of both funds are very similar, as are the charges. For active managers the performance and charges can vary widely, and even though on average active managers can add value, some have done better than others. The best performing fund has been M&G Global Basics with a 185.34% return over 5 years and the worst has been MLC Diversified Share portfolio with a return of 91.18%.
North America
In the US, there are also only two tracker funds and 66 active manager funds. The best performing funds were from the smaller companies sector and included Schroder US Smaller Cos and Legg Mason US Smaller Cos. What is more surprising is who appears at the bottom of the list; Legg Mason US Equity run by Bill Miller continues to disappoint having returned 60.99% in five years (i.e. £100 invested would have lost £39). This manager was once able to outperform the US market year in year out for over a decade.
UK All Companies
In the UK All companies sector tracker funds will include FTSE 100 and 250 index trackers. Tracker funds are more common here with 31 out of a total of 243 funds. Active managers have traditionally added value in the smaller companies area and most funds will be multi cap, giving managers the flexibility to outperform more restrictive tracker funds. The best performing fund was Rensburg UK Mid Cap Growth which returned 175.42% over 5 years, whilst the best tracker fund, RBS FTSE4Good Tracker Standard, returned 128.72%, a difference of 9.34% per year.
Conclusion
The research demonstrates that choosing between the difference between a good and bad active manager can make all the difference in performance of your investments. Tracker funds have their place within any portfolio, but in the end their performance will be somewhere in the middle. Investors need is to be able to sort out the wheat from the chaff. Out of the many, there are star managers who can add value. They will ignore the short term performance of their investments as it is difficult to predict and continue to assess each investment on their individual merits not on market sentiment.
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