one would expect. An analysis of the full universe of passive unit trusts that tracked the Alsi and Top40 benchmarks over the last 10 years shows that the average underperformance of this universe has been a staggering 0.95% per annum, at least twice the number I would have expected. We do not have access to the underlying data, but I think that the bulk of the performance gap has come from passive managers charging active-type fees for a passive service (the average fee charged by passive unit trusts seems to be around 0.57% after VAT). Second, it really should not be a surprise that so many active managers underperform the market after fees, if you think about it enough you realise that the debate around the efficiency of markets is a red herring. Alpha is after all a zero-sum game, given that the sum of all investors’ returns cannot exceed the total return of the market. This makes it close to a mathematical certainty that the aggregate return of all active managers will not beat the market. Once you add in fees and other costs many active managers actually underperform.
This takes us to the key point: investors don’t buy the full universe of active managers.
I have yet to meet a client that has bought each and every one of the 130odd general equity unit trusts available today. Most of them, with the support of an independent f inancial adviser in the retail market, or an asset consultant in the institutional market, will diversif y their exposure between three or four active managers. We at Coronation don’t think that the task of identifying the winning long-term active managers is that daunting.
A portfolio of the long-term winning active managers has delivered outsized returns when compared to the market (as well as significantly better risk and volatility metrics). Over long periods of time the numbers have, in fact, been nothing short of retirement changing. Will every one of these active managers outperform in the future? Probably not, but I’d happily bet that a basket of them will comfortably beat the market after all fees and costs. PASSIVE FUNDS AND ASSET ALLOCATION The most important task in investing