Active fund managers still have a lot to offer

There are many compelling reasons not to surrender to passive investing

At the head of the burgeoning ranks of the UK’S fund management industry there is a sudden and dramatic crash. Neil Woodford, front-line leader and showcase warrior, has been struck down. The line, bereft of its champion figurehead and hero, buckles in confusion.

In a previous era, our resolute active fund managers might have stepped forward with the cry: “I am Spartacus!” But instead, supporters break rank and desert the field for the relative calm of the passive fund sector.

The active fund manager exemplar is ignominiously slain! And from overhead comes another withering shaft of arrows from the ranks of independent financial advisers. “Switch to the index trackers while you can!” is the advice. “No nasty surprises! The fees are lower! There’s less risk of a Woodford-style collapse in fund values!”

Investors have already poured huge sums of money into tracker funds over the past year as the shift away from active management and towards passives has gathered momentum. And the Neil Woodford debacle, one of the most spectacular failures ever in the history of professional investment management, will almost certainly have further shaken confidence and accelerated the flight.

As trapped investors contemplate the wreckage of the once £10 billion Woodford Equity Income Fund in a collapse that could cost them almost half their money, one question dominates: why chase the ever-elusive rainbow’s end of index outperformance when so many active managers fail to achieve this – and not opt instead for an altogether less nerve-wracking life by opting for a fund that closely mirrors the index?

Only 39 of 345 British company funds have beaten the broad measure of the UK market – the FTSE All-share – so far this year. That is a troubling statistic that will further underpin the flood of money leaving actively-managed funds and going into index tracker and exchange-traded funds (ETFS).

Investors are attracted by the relative lack of volatility and nasty surprise, while IFAS are relieved the responsibility of recommending active funds. Few are ever likely to be fired for guiding clients to an index-tracker.

Almost £28 billion has been pulled out of active funds investing in the UK market since the start of 2017, while investors have allocated an extra £10.2 billion to alternative tracker funds. And sales of ETFS have notably spiked in the past three months with assets growing 10 per cent in the

June-september quarter.

According to FE Trustnet, among the stand-out winners is the Vanguard Lifestrategy 60 per cent Equity fund which has grown in size from £4.5 billion a year ago to £6.7 billion. Overall, the Vanguard Lifestrategyrange–five multi-assetfunds built from individual Vanguard index trackers – have been very popular since launch in 2011 because of their low fees, easy-to-understand approach and strong returns.

Among other index trackers to have enjoyed the strongest Assets Under Management (AUM) growth in the Investment Association universe are State Street UK Equity Tracker, ASI Global Corporate Bond Tracker and Blackrock ACS World E-UK Equity Tracker.

Latest IA figures show that there is now £215 billion held in tracker funds. Since the start of 2017, the value of money in tracker funds and ETFS has surged, with the latter growing by 37 per cent.

From all this, it would be tempting to conclude that investor demand for actively managed funds and trusts may be permanently on the wane. But while the growth in passives in recent years has been striking, they still account for just 17 per cent of the total of industry funds under management. And while pension funds and life assurance portfolios may account for a large proportion of the 83 per cent in the actively managed sector, there are still compelling reasons why private investors might not surrender totally to the charms of passive investing.

First, they may seek portfolio diversification to spread risk and avoid having all their equity investments in the biggest and most popular quoted companies. If the aim is capital protection rather than matching indices that may prove vulnerable to correction and sell-off, they may choose a trust such as Edinburghbased Personal Assets Trust with large holdings in government bonds and gold-related assets.

And there is the enduring allure of investing in funds specialising in specific sectors offering greater opportunities for capital growth (Baillie Gifford’ s Scottish Mortgage Trust, for example) or those with a corporate governance or sustainability remit.

Even in the popular UK equity income sector, actively managed trusts can offer outstanding performance. For example, out of 25 UK equity income investment trusts, 15 beat the sector average growth of 32 per cent, with top performer Finsbury Growth and Income gaining 97.6 per cent.

Such returns will always attract private investors aspiring to do better than the bogstandard index – and are prepared to take the risk of opting for this choice. Spartacus may be down, but far from out.