The active approach is still worth considering

THE debate between picking actively-managed funds, where investment managers aim to outperform an index, and passive funds, which track the performance of an asset or an index, rages on. Both can be held in a stocks and shares Isa, and both seemingly offer attractive returns to investors.

But last year, Lipper found that just 38 per cent of actively-managed UK equity funds outperformed their benchmarks over a 10 year period. Considering that they charge higher fees, investors should question whether they’re worth the money.

Over the last three years, for example, the Investment Management Association (IMA) UK All Companies index grew by 10.5 per cent. The actively-managed Investec UK Alpha fund delivered the same performance, but charged an annual management fee of 1.5 per cent of assets under management (AUM), and levied an initial fee of 4.5 per cent. In contrast, the F&C FTSE All-Share Tracker fund, a passive fund, has no initial charge, a small annual fee of 0.3 per cent AUM, and still did as well as its Investec rival.

TOP DOGS

The expertise of fund managers is supposed to give them an edge and justify higher fees. And some top active fund managers do manage to outperform their benchmarks. Take the Odey absolute return fund, which has consistently outperformed the IMA absolute return sector. It charges an initial fee of up to 4 per cent AUM (although this is often discounted), and an annual fee of 1.25 per cent. While the absolute return sector has only returned 3 per cent over the last three years, Odey has delivered 27 per cent. Some active managers are worth their fees.

Simon Blundell, an active fund manager at BlackRock, says that an active approach from an above-average fund manager is important at times of uncertainty. He points to the corporate bond sector. Many argue that it is in a bubble, but through research and access to the market that his competitors may not have, Blundell thinks he sees opportunities – particularly in the telecoms sector – that are not obvious to others. This approach has helped him beat his benchmark by over 13 percentage points over the last five years.

A SOLID CORE

Passive funds aren’t without their challenges, however. Research by Bestinvest found the cost of passive funds that track the same index can vary markedly. There was a range in the annual fees between 0.15 per cent and 1.5 per cent for funds tracking the FTSE All Share index. Investors need to shop around when investing in both active and passive funds. Compareyourtracker.co.uk and other tools can help you find the best value funds.

Investors could have a mix of both active and passive funds within their portfolios. One approach could be to build the foundation of your portfolio on passive funds, and complement with actively-managed funds with a strong track record.

The challenge is then to find top performers with a strong record, and research tools from Morningstar or FE Trustnet will help you. While it may take some effort – and may be worth seeking advice – the right active fund manager can help your portfolio to outperform.