Investors who trust their money to expensive fund managers are typically worse off than if they put it in a low-cost market tracking fund, research reveals.
Analysis by investment platform AJ Bell shows that over the past ten years, more than 60 per cent of funds invested in stocks run by a professional money manager have failed to outperform rival investments which track — rather than aim to beat — the same stock markets.
This means the case for building an investment portfolio around a core of low-cost index-tracking funds remains stronger than ever.
Funds that are managed by investment professionals are often referred to as ‘active’.
This is because the managers attempt to beat the market through astute stock picking and they often charge handsomely for their expertise.
Off track: More than 60% of funds invested in stocks run by a professional money manager have failed to outperform rival investments which track the same stock markets
In contrast, funds set up to track the performance of a specific market, such as the FTSE 100 in the UK or the S&P 500 in the U.S., using sophisticated computer programmes, are known as ‘passive’. These funds tend to have lower ongoing charges.
Active funds have underperformed the most when it comes to investing in a basket of global and U.S. stocks.
For example, over the past ten years, the average passive fund tracking the performance of the U.S. stock market has delivered a return of 278 .
This compares with the average return of 239 per cent from an actively managed U.S. fund.
Returns for passive and active funds that invest in the global stock market are 195 per cent and 155 per cent respectively.
‘The active-versus-passive battle is increasingly being won by tracker funds,’ says Laith Khalaf, author of the report.
Yet he still believes both investment strategies can be ‘happily used alongside each other in the same portfolio’.
Khalaf adds: ‘The decision to invest in active or passive funds is, perhaps surprisingly, not binary.
Unlike disciples of passive or active styles, private investors needn’t be dogmatic in their use of either strategy.
‘It’s possible to mix and match active and passive funds within a portfolio, perhaps picking active managers you have a great deal of confidence in and then gap-filling using tracker funds.’
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