Proponents of passive funds argue that that most fund managers underperform the index. Their seemingly logical conclusion is that a fund that simply tracks the index is a good way to invest and offers equity returns at low cost.
However, I would like to present a very simple counter argument. Why compare against most fund managers when there are a number of perfectly good fund managers that consistently outperform the index. It seems that the successes of these fund managers are being conveniently overlooked in the passive fund PR exercise.
Over the last 5 years the Virgin UK Index tracking fund has done a perfectly good job of achieving its objectives. The average fund in the UK Equity sector has managed an overall return of 26.89%. The Virgin fund has grown by 29.71% over the same term.
Of all the available UK Equity sector funds with a 5 year history, 138 funds performed better than Virgin and 207 worse.
So the argument for a passive tracker fund is certainly accurate in pointing out that most fund managers underperform, but shouldn’t we also take a look at the skilled fund managers before we make our mind up?
As an Independent Financial Adviser, it is my job to help my clients invest in appropriate funds, where the fund manager can demonstrate a consistently good track record. I really don’t have to look that hard. For many years, I have frequently recommended the Fidelity Special Situations fund. Over the same 5 years, this fund has achieved 51% growth. This fund has been running with great success since 1979. Other favourites within this sector include the Invesco perpetual High Income fund with 52.82% growth, M&G Recovery with 69.86% growth and Newton UK Opportunities with 49.33% growth.
However, we’ve all heard the phase of ‘not putting all your eggs in one basket’. None of us know what’s round the corner and assessing the markets is very difficult. A good fund can fall from favour, or a mediocre fund can come good. New fund launches are commonplace and consequently there are funds now emerging with a strong 2 or 3 year track record which I am keen to recommend.
I would suggest that the best solution for investment growth is a well chosen portfolio of funds across a selection of asset classes. These funds should be periodically reviewed with a view to switching funds if necessary. Whether you have a pension fund, investment bond or an ISA portfolio, I would love to help you to achieve your objectives.
Source: Synaptic Research 18/12/09
