Market volatility should be an opportunity for active fund managers to prove their worth.
10:00AM GMT 28 Nov 2011
3 CommentsWhen I worked at Money Marketing, the leading newspaper for financial advisers, in the late 1990s the City was abuzz: the stockmarket was riding high and investors were making lots of money.
At the time, fund managers tried to put me off the scent of index tracker funds.Their argument was that so-called passive funds that simply track a stockmarket could not add extra value – only managers who were selecting their own stocks could.
The active fund managers' argument would have been sound had it not been for one point I have come to realise over time – that many active fund managers consistently fail to add value. And they still do, as our front page report highlights.
Our article comes just a week or so after it emerged that sales of index tracker funds are at record levels. One factor that explains their popularity is fees, because tracker funds are far cheaper than actively managed ones. The stockmarket turmoil has put increasing focus on fees, which eat into returns. For obvious reasons, fees are under bigger scrutiny when returns are poor – few investors would give two hoots about fees if they were getting bumper returns year in, year out.
Vocal city stalwart Terry Smith has added his voice to the passive funds debate, even though he is an active manager. He argues that investing has become too complicated for savers, and that most investors would be better off buying cheap tracker funds.
When I suggested to him earlier this year that such a comment would irritate active managers, he retorted: "I don't care if they argue that trackers will underperform. Most active fund managers underperform, and by a far greater margin, because of higher charges."
This is not to say that you should dismiss active fund managers. I readily admit that if you can find a decent one they will serve you better than a tracker fund, which will always underperform the index because of the impact of fees. As I highlighted last week, the Virgin UK Tracker has underperformed the FTSE All-Share by 50 percentage points over the past 15 years.
There are nearly 2,000 funds on the market, and an awful lot fail to make the grade – but they charge annual fees as though they do. This is why you need to ensure that your financial adviser (IFA) is earning his or her crust. There are enough decent fund managers out there, and if you or your IFA discover them, you will be chuffed to bits over the longterm.
Market volatility should be an opportunity for active fund managers to prove their worth. Yet it would seem, however, that many simply aren't up to the job.
