Funds that give you the biggest bang for your buck

Fund investors stand the best chance of beating the stock market by buying those that back small British companies, new research has found.

Nearly 98pc of “active” funds investing in the smallest London- listed stocks beat the return of “passive” funds which track the performance of that market, over the past five years, according to a study from investment consultancy Albemarle Street Partners.

Funds buying British dividend-paying stocks boasted the next- best record, with 92pc returning more than passive fund alternatives, well ahead of funds operating in other markets. Only 37pc of global funds beat equivalent stock market trackers over five years, while just a third of funds buying American shares returned more than passive US stock funds.

Albemarle’s Active Payback report calculated how much investors in active funds, whose managers try to beat the return of their markets, gained for every £1 invested over passive funds tracking those markets, after fees.

The best fund investing in small British stocks over that period was Stonehage Fleming Aim, which returned £ 1.70 more than a passive alternative for every £1 invested.

Laith Khalaf, of broker AJ Bell, said fund managers had a better record of picking winning small company shares from Britain’s market because it was easier to find those that had flown under the radar. “There’s a smaller pool of eyes looking at smaller companies,” he said. “It’s easier to pick out the hidden gems.”

Other markets were more closely scrutinised, making it harder for fund managers to gain an edge, added Albemarle’s Charlie Parker. “Markets like the FTSE 100 are extremely heavily researched, and it is arguably harder for fund managers to find opportunities that others have missed,” he said. “America’s market is consistently hard to beat because it is the most effectively researched market in the world.”

However, a fund investing in US stocks, Baillie Gifford American, was the best performing on Albemarle’s measure over the past five years, returning £2.99 for every £1 invested over a tracker fund. Morgan Stanley US Growth was second, returning £2.35.

Baillie Gifford was also the best performing fund group, with its funds delivering on average 64p for every £1 invested over the past five years, versus a passive fund. River and Mercantile was next best, returning 36p.