Why nearly two-thirds of UK funds last less than a decade

Only 43% of UK equity funds that were being operated at the start of 2008 were still going at the end of 2017, according to research carried out by The Economist's Buttonwood columnist.

The fact that almost two-thirds of UK funds shut down over past decade reinforces a 'survivor bias' in fund management. Those funds that have survived the last decade, are the ones that have performed well, while those that underperformed were either closed down or merged into another fund.

Buttonwood equated this with the golf concept of a 'mulligan' when a player is given a second change to take a shot.

"Give an averagely talented player enough mulligans and he or she will get one close to the hole."

Given that poorly performing funds drop out of the performance figures of sector averages, the remaining managers' performance looks better than it would have otherwise.

However, Adrian Lowcock, investment director at Architas, points out that often performance figures are not weighted "so each fund has an equal impact on sector performance which can lead to survivorship bias being overstated".

He recommends that instead of looking at the number of funds closed, we should look at the amount of assets these funds held relative to the sector to see the impact on the active management performance.

Research by Lyxor ETF shows that in 2017, 30% of UK equity active managers managed to beat the FTSE All Share Index. Over 10 years one in four active managers outperformed. And on average, the UK Equity fund group underperformed the index by 1.4%.

Adam Laird, head of ETF Strategy at Lyxor ETF, says: "The reassuring thing about these numbers is that there are clearly some skilled active managers in UK equity, but it's critical you pick the right one. For every manager who beats the index, three are leaving investors disappointed."

He adds a point on longevity. "If a manager has beaten the market consistently over a 30-year career, perhaps they've got the skill to keep going. But they're probably running close to retirement."

Vitali Kalesnik, director and head of equity research at Research Affiliates, adds funds that underperform tend to see their assets dwindle over time before they are eventually shut down.

He adds that although the survivors on average have outperformed the market, the survivorship bias also means that at any moment in time it looks like the average manager handily beats the recent likely investor experience.

"The nuance that most investors miss is that it is only the surviving managers outperform. This nuance can have quite dire implications on investor returns. It makes investor frequently change managers looking for the skilled ones," says Kalesnik.

While passive investments don't outperform indices by nature, they also do not heavily underperform them. Smart beta funds, on the other hand, aim to deliver an index-beating return through following a set of 'rules', for instance only tracking shares with high dividend yields.

"One of the big attractions of a passive investment is reliability," adds Laird. "You know if your fund or ETF tracks the FTSE 100 index today, it'll track the FTSE 100 in ten years. On the other hand active managers can leave, performance can dip or they can change strategy."

Full performance can be found on the company or index summary page on the interactive investor website. Simply click on the company's or index name highlighted in the article.