Investors shun failing fund managers

It’s a constant debate among investors – do you go for an active or passive approach?

Passive funds track a particular index such as the FTSE 100, in an attempt to mimic returns made by a whole market. Active funds may only invest in a small handful of what they believe to be the very best stocks in a given sector in order to post returns in excess of the market as a whole.

In theory, when markets fall, actively managed investment funds have a better chance to post higher returns than passive rivals. This is because passive funds are forced to remain invested in poorly performing companies, while active managers can react to market events, dropping the bad performers and scooping up the market winners.

Last year should have seen a reversal of fortunes for actively managed funds, which have lost trillions of investors’ cash to cheaper index trackers in recent years. But, with sharp falls in share prices, investors carried on pulling their money. Of the £11bn that savers withdrew from stock market funds in 2022, three quarters was pulled out of actively managed funds, according to the fund data provider Calastone.

It comes as just 27pc of active funds outperformed passive alternatives last year, according to the investment firm AJ Bell. Over the past 10 years, just 39pc of active funds have delivered better returns than passive funds, it said.

Rob Morgan of the wealth manager Charles Stanley said: “There is increasing focus on cost, which is one thing all investors can control and is significantly higher for active management.”

The average passive index tracker charges 0.11pc, while active funds typically charge fees from 0.7pc to 1.5pc.

For many investors who hold active funds, 2022 may have been the final straw. But Rob Burgeman, of investment management firm RBC Brewin Dolphin, said investors should remember there are almost no fund managers who will outperform in every economic environment. Last year was abnormal in the severity of the downturn due to rising interest rates, soaring inflation and the war in Ukraine, he said.

But passive funds, too, have their limitations. While trackers are well-diversified by nature, no single passive fund covers all asset classes. “America’s S&P 500 index is heavily weighted to technology and e- commerce companies, whereas the UK’s FTSE 100 is more weighted to old economy areas such as financials, energy, and mining,” Mr Morgan said. “These stylistic biases can have a big impact on returns.” Investors’ overall asset allocation matters more than choosing active or passive, Mr Morgan added.

Mr Burgeman said the most important thing was to stay diversified: “Have some growth, but partner it with some income and some value-investing styles.”