Active funds beat trackers in choppy market

According to research by S&P Dow Jones Indices, the majority of active UK equity fund managers returned more than their passive benchmark in the year to 30 June, with 82% outperforming the S&P UK BMI index.

UK large and medium-sized company funds returned the most, with 92% of actively managed funds beating the S&P UK Large/Mid Cap index over the year to the end of June. However, S&P says that this stands in stark contrast to UK smaller company funds, with the majority of funds underperforming their benchmarks over one, three, five and 10-year periods.

Moreover, the market data specialist says that when taken over the longer term all actively managed funds saw their performance dwindle, with 52% trailing their benchmark over five years and 73% trailing over the 10 years to 30 June.

Passive popularity

In addition, the firm says that around half of UK active funds disappeared over a 10-year period. The only exception was the emerging markets equity funds group which did best with only 27% of funds disappearing.

The data reinforces the growing popularity of passively managed funds. According to the Investment Association, as at the end of August, passive funds accounted for 12.2% of the open ended UK fund universe. This is up from 10.8% in August 2014 and represents more than £103 billion of assets.

Index tracker funds have also begun to dominate our monthly top 10 most-bought list, with funds from passive specialist Vanguard now accounting for five out of 10 of the most popular open-ended funds on the site.

Rebecca O'Keeffe, head of investment at Interactive Investor, comments: "A year ago just one of our top 10 most-traded funds was a tracker fund, but we have seen a significant shift towards passive investing over the past year and passive investments now represent over 25% of our net monthly sales.

"Low-cost portfolios are straightforward and represent real value for money as well as delivering on performance, in particular during bull markets and when the benefits of accommodative central bank and government policy are helping the entire equity market."

However, O'Keeffe warns investors to be wary of relying solely on passive funds, adding that, as markets become more volatile, active management can outperform. This suggests why active funds have been so successful in the year to 30 June, with a plummeting oil price and concerns over a slowdown in global growth causing widespread stockmarket volatility.

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.