Many investors are paying significantly more for actively managed investment funds despite evidence that a large proportion of those products have underperformed comparable tracker funds over the long term.
The warning comes from Martin Rayner, a financial adviser at Compton Financial Services, who said investors should pay closer attention to the relationship between fund charges and investment performance when building portfolios for pensions and Individual Savings Accounts (ISAs).
Higher Charges Do Not Always Translate into Stronger Performance
Most retail investors gain exposure to shares through either actively managed funds or tracker funds. Active funds rely on fund managers to select investments, while tracker funds are designed to mirror the performance of a specific market index such as the FTSE 100, FTSE All-Share or S&P 500.
According to Martin Rayner, tracker funds typically charge annual fees ranging from 0.05% to 0.2%, reflecting their lower operating costs. Active funds, by contrast, often charge between 0.5% and 1% a year because of the resources required for stock selection and portfolio management.
Rayner argued that higher charges could be justified if active managers consistently delivered stronger returns. He pointed instead to data from the Standard & Poor’s Indices Versus Active (SPIVA) research programme. According to the SPIVA figures cited by Rayner, 97% of active funds in Europe underperformed the S&P Europe 350 index over a 10-year period.
“The data on how active funds perform relative to trackers is astonishing and is something more regular investors need to be aware of,” Rayner said. He added that many investors continue to pay higher fees despite evidence showing that most active funds have failed to outperform comparable tracker funds over extended periods. “In short, many people are paying through the nose for underperformance,” he said.
Tracker Funds May Form the Foundation of Many Portfolios
Rayner said the primary objective for many long-term investors is to achieve steady growth while keeping costs under control. In that context, he argued that tracker funds can provide a strong foundation for investment portfolios.
According to Rayner, investors saving through pensions and ISAs are often looking for consistent returns without seeing gains reduced by high fees. He said there is a strong case for low-cost tracker funds to form the core of a portfolio for many individuals.
At the same time, he did not suggest that active funds should be excluded entirely. Rayner noted that some actively managed funds do outperform tracker funds and may still have a role within a diversified investment strategy.
“This is not about ruling active funds out altogether,” he said, explaining that active funds may be used to gain exposure to specialist sectors or emerging markets.
Rayner stressed that investment decisions should always reflect an individual’s circumstances, objectives and tolerance for risk. According to the adviser, there is no single approach that suits every investor, and portfolios should be tailored accordingly.
He nevertheless maintained that investors allocating substantial sums to active funds should understand the historical performance data. The key point, he said, is that a large majority of active funds have underperformed comparable tracker funds over the long term while charging higher fees, a factor that investors may wish to consider when assessing their investment choices.
