The case for investing in actively managed funds has been struck another blow as less than 1% of these funds manage consistently good returns.
Research from F&C asset management has revealed that only a pitiful number of actively managed funds achieve consistent top quartile returns, despite all of them charging a premium for the skills of a fund manager.
There are 1,140 actively managed funds in the 12 main investment association sectors but only nine of them have achieved top quartile returns over the past three years. That works out as a measly 0.8%, far below the historic average of between 2% and 5%.
“In the first quarter of 2017, our survey revealed an unusually low number of funds achieving consistent top quartile returns,” says Kelly Prior, investment manager for F&C Multi-Manager Solutions.
“This is not surprising given how much markets were impacted by geopolitical factors and central banks policies. Despite the Federal Reserve raising interest rates, the dollar fell back as confidence in the ability of President Trump to push through market friendly policies fell. However, the yen was the beneficiary of this, making solid ground over sterling as a perceived safe haven currency.”
How different sectors performed
Of the 12 investment sectors, eight didn’t have any funds that achieved top quartile returns. In the sectors that did the Emerging Markets sector comes out on top with 3.3% of its funds managing top quartile returns. It was followed by the Sterling Strategic Bond sector at 2.9% then the Corporate Bond sector at 2.6% then UK All Companies with 1.2%.
Lowering the performance target to simply deliver above median returns over three years meant that 124 funds passed. A quarter of these funds were in the Corporate Bond sector.
Don’t ditch active investing just yet
However, this doesn’t mean you should abandon active investing, according to Darius McDermott, managing director of Chelsea Financial Services.
“Passive funds will never consistently be in the top quartile due to their very structure – they will be the market minus costs, even if those costs are small,” says McDermott.
“All actively managed funds will have some periods of underperformance and expecting funds to be top-quartile all the time is unrealistic. Over time, if a fund is consistently better than average (i.e. second quartile) then the cumulative figures add up and they will be towards the top over all.
“There is far too much short-termism when it comes to investing at the moment. Patience is required and an understanding as to why and when a particular fund may out- or underperform. I’m still very much an advocate of active-management.”
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