MONEY COMMENT
Trackers Beat Fund Managers - Again

By Jane Mack (TMFJane)
April 7, 2004

The latest report comparing the performance of actively managed funds and simple trackers has shown for the sixth year running that active fund managers are still failing to beat index trackers over the long term.

The annual report from the WM company surveyed 44 actively-managed retail funds with a 20-year performance record revealing that only eight of them managed to beat the FTSE All-Share index in the 20 years to 2003. Once you take into account all the funds that fell by the wayside over this timeframe, and therefore do not have a 20-year record to look at, you can see the chances of a fund beating the index over the long term are very small indeed. 

The reasons are quite simple. Active funds cost more to invest in. Trackers typically have no initial charge and an annual management charge of 1% or less whereas managed funds often have initial charges of as much as 5% and annual charges of around 1.5%. Fund managers also tend to buy and sell more shares each year, so they incur more in the way of dealing charges too.

As it happens, if comparing performance over just one year, the median actively managed trust did marginally better than the index gaining 20.3% after management charges, compared to the 19.9% median return for passively managed FTSE All-Share tracker funds.

But investment should be for more than just one year and over the 20-year period, the figures show that only 18% of funds that made it that far outperformed the index.

The top managed funds will boast that they have performed magnificently for one, three or five years but ask how well they've performed over 20 years or more or whether it's the same 'good' fund manager running it, the answer will probably include one or more of the following:

• The fund didn't exist one, three or five years ago, let alone 20 years ago
• The fund was merged with another one (possibly because of poor performance) so you can't rely on the data for comparison
• The 'good' fund manager was poached by another company
• The 'good' fund manager got burn-out from shouting 'Buy! Sell! No, Buy!' into the telephone all the time and left to spend more time with his family

As Alastair MacDougall, head of research at WM points out: "The dilemma facing the individual investor is selecting an active manager who will outperform. The performances of actively managed trusts are, with few exceptions, inconsistent. The chance of choosing an active manager who will outperform over the long-term has to be off-set against the relative predictability of a tracker trust."

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