Alex's Blog

Actively managed funds vs. tracker funds: Chalk and cheese?

The value of investments and the income they produce can fall as well as rise.

Tax planning is not regulated by the Financial Conduct Authority.

I remember one of the professors at my post grad school saying that, ‘if you take a sample of say 10 people from the street and asked them to pick say 30 stocks from the universe of stocks listed randomly: The outcome is that those funds (comprised of 30 stocks) picked at random would perform on average as well as 50% of funds available in the market today .. ’

Quite simply what this suggests is that picking actively managed funds for our pensions, stocks and shares ISAs and personal portfolios is a difficult thing to do well even for experienced fund managers.. or not as the case may be!! The statistics also support this, where 60% of actively managed mutual funds underperform their benchmark. Source Standard & Poors.


CURVE BALL: The reason that a majority of funds lag the market is NOT necessarily poor stock performance or poor stock picking ability BUT the aggressive FEES charged by actively managed hedge or mutual funds stunting capital growth.

FACT: Fees from tracker or index funds are typically substantially lower than actively managed funds or discretionary funds for that matter and as a result, in the long term, tend to put perform their peers.


BALANCE: Actively managed funds have an important role to play. A good portfolio manager might choose to hold a few select actively managed funds which they believe could outperform the market or provide some hedging function within a portfolio. However, most of the portfolio 65%+ might typically be held in low fee tracker funds.

The effect of this is to reduce the average fee from funds across the portfolio whilst attempting to benefit from a well-diversified and targeted fund selection.

The reality is that active funds, passive funds and discretionary funds all have a place and each can be used effectively in different market conditions.

A CActively managed funds vs. tracker funds: Chalk and cheese?