Too few funds aiming for long-term goals

Actively managed funds often come under criticism for not being able to outperform their benchmark indices consistently.

The often-quoted figure is that only 10% of retail active managed funds achieve this.

As passively managed funds have come back to the fore since the financial crisis, the criticism seems to have intensified, prompting Fund Strategy to undertake an investigation of FE Trustnet data to see how onshore retail funds have fared over the past five years.

How should the performance of these funds be judged? Traditionally, they are compared either with their peers or their benchmark index. The problem with comparing funds to their peers is that in reality it means little to investors. A fund may have out­performed its peer group by 10 percentage points, but if the whole peer group fell 20%, the investor is no ­better off.

Relatively, you may have done better, but relative performance does not pay the bills. The relative performance argument can also be used against comparing funds with their respective indices as well. However, by being able to demonstrate consistent outperformance of your index, you can at least justify the fees an investor is paying over those of a passive fund. (Comment continues below)

Some funds, such as the Distinction Diversified Real Return fund, run by Armstrong Investment Managers, aim to beat inflation. However, for the purposes of the Fund Strategy investigation, funds were ranked against their benchmarks – typically not their sectors – and against a savings account with a reasonable rate of interest, midway between the rise in the retail and consumer prices indices over the period.

Just 18% of onshore retail vehicles, or 254 funds out of a universe of 1,425, outperformed both their benchmark targets and cash. Interestingly, those few that managed it had run their funds for more than double the industry average of just three years. Pressures on delivering good one-to-three-year numbers have led managers to become more short-term in their outlook, to the detriment of long-term performance.

However, if managers are financially locked into a group, it provides an incentive to stay, allowing the them to focus on doing the best for the fund in the long term. Chelsea Football Club should take note: its most successful rival has had the same manager for 25 years. Manchester United were on the verge of sacking Alex Ferguson early in his career, but stuck with him and have reaped the rewards.

Fund Strategy’s survey seems to suggest that those managers who have stuck around, rather than chopped and changed, have delivered the best long- term returns.