Where is it worth pay­ing for a hu­man stock picker?

The Daily Telegraph - Your Money - - YOUR MONEY -

Fund man­agers ap­pear to beat some mar­kets more of­ten. James Con­ning­ton looks at when they are worth pay­ing for

Low-cost, com­puter-driven funds that track the mar­ket are soar­ing in pop­u­lar­ity, while the higher fees and ques­tion­able per­for­mance of hu­man man­agers come un­der greater scru­tiny. How dif­fi­cult is it for an “ac­tive” fund man­ager to beat the mar­ket?

Data com­piled by Tele­graph Money, look­ing at a range of coun­tries and mar­kets over the past five years, shows it is more of a gam­ble in some sec­tors than oth­ers.

In gen­eral, the more de­vel­oped and well re­searched a mar­ket, the more ac­tive man­agers strug­gle to out­per­form.

Only in­dexes that are avail­able to buy via a tracker or ex­change traded fund have been used for com­par­i­son.

Amer­ica is the best re­searched mar­ket, and just 20 out of 87 ac­tive US fund man­agers beat the main in­dex, the S&P 500 – over five years.

Only 7pc of funds beat the in­dex by more than 10 per­cent­age points.

Adrian Low­cock, in­vest­ment di­rec­tor at Ar­chi­tas, said: “Every­one knows the same thing about Amer­i­can com­pa­nies at the same time, mak­ing it hard to gain an edge.” The ma­jor­ity of global man­agers fail to beat the mar­ket.

Mar­kets such as Amer­ica – which are hard to out­per­form – make up a large pro­por­tion of avail­able stocks for these man­agers. Asian mar­kets could pro­vide ac­tive man­agers with room to out­per­form. How­ever, big eco­nomic de­ci­sions made by gov­ern­ments hold sig­nif­i­cant in­flu­ence over Asian mar­kets, which only some ac­tive strate­gies will ben­e­fit from at any given time.

Mr Low­cock added that many man­agers had been “caught out” in the past, and hadn’t al­ways paid enough at­ten­tion to in­di­vid­ual com­pa­nies.

In Ja­pan, gov­ern­ment poli­cies, cen­tral bank de­ci­sions and ex­change rate move­ments are of­ten the main drivers of per­for­mance.

Only 37pc of funds have re­turned more than 10 per­cent­age points more than the in­dex over five years.

There is one anom­aly – top per­form­ing Legg Mason IF Ja­pan has re­turned 275pc over five years, more than dou­ble its near­est ri­val.

The Euro­pean mar­ket is less de­vel­oped and un­der­stood than Amer­ica, and has a wide range of coun­tries to choose from.

Man­agers should be able to take ad­van­tage of this to beat the in­dex – FTSE World Europe ex­clud­ing UK – yet just over half do.

The Euro­pean mar­ket faces enor­mous po­lit­i­cal risk, and as we saw in 2016 it is dif­fi­cult to pre­dict the out­comes. The FTSE All Share cov­ers 98pc of the UK mar­ket and in­cludes FTSE 100 giants along­side smaller com­pa­nies. The UK mar­ket is highly de­vel­oped so it is sur­pris­ing that 148 funds – or 64pc – beat the in­dex over five years. How­ever, the re­gion has a num­ber of funds that Where do man­agers beat the in­dex? Sec­tor

UK All Com­pa­nies UK Smaller Com­pa­nies Amer­ica Europe Global Ja­pan Asia Emerg­ing Mar­kets

Five-year in­dex re­turn

63%

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