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Active funds underperform passives in market downturns


Few active funds have protected investors better than passives in market downturns, FE data shows.

The research carried out by Bristol-based IFA Wychwood Financial Services and shared with Money Marketing shows average funds in the UK, US and Global Equity sectors have returned less than the equivalent passive funds over the past 10 years.

In downturn conditions they have performed significantly worse. For instance, the average survived fund in the UK All Companies sector lost 32.02 per cent in 2008.

The L&G 100 Index fund, however, lost 27.88 per cent, which puts it in the second quartile.

Many active funds lost 40 per cent or more in the same year.

One active fund, the SVM UK Opportunities fund, lost 54.87 per cent. The lowest active fund loss was the Newton UK Equity fund at 17.98 per cent.

In 2008 many Global Equity Sector active funds lost close to, or more than 50 per cent, while the worst performing passive fund, the L&G Global 100 Index Trust, lost 14 per cent.

The best performing fund for the year was a passive fund, the L&G Global Health and Pharmaceutical Index which was up 8.36 per cent.

Within the Global Equity sector in 2008 the average fund was down 24.18 per cent.

The L&G Global 100 Index was down 14.19 per cent, while the Blackrock NURS II Overseas Equity fund lost 18.50 per cent and the Aviva International Index fell 18.92 per cent, putting them all in the top quartile, the data shows.

Speaking to Money Marketing Wychwood Financial Services director Rob Wood says: “Passive funds have a large cap bias and will generally protect on the downside, when compared to products that hold a higher proportion in smaller companies.

“This will not always be the case, but generally over history larger companies have been more resilient than smaller ones in a downturn, and for obvious reasons.”

Diamonds in the rough

In 2011, the average survived fund in the Global Equity Sector was down 9.43 while the L&G Global 100 Index dropped 3.42 per cent, the Vanguard FTSE Developed World ex UK Equity Index fell 5.61 per cent, and the Blackrock NURS II Overseas Equity fund slipped 6.41 per cent.

In that year, many active funds lost close to, or more than 20 per cent.

Again, the best performing fund was the L&G Global Health and Pharmaceutical Index, which was up 10 per cent.

The FE figures in the research don’t include closed or merged funds, which would have made the results “almost certainly” worse, Wood argues.

He says: “There are many advisers and consultants that believe active funds protect on the downside, but passive funds do not. Passive is a bull market product only I hear them cry, buy an active fund, pay higher fees and we will protect you from financial Armageddon.

“Some funds have significantly protected on the downside but given the above it’s clearly only a small proportion. Therefore the chance of finding the funds you need in advance of a downturn, from the small proportion is nigh on impossible.”



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There are 11 comments at the moment, we would love to hear your opinion too.

  1. Seems to me a good argument for dynamic asset allocation and stock-picking, i.e. don’t be in particular sectors when they are overvalued. Discretionary management perhaps?

    • Why not do dynamic asset allocation using trackers and cut the costs you can still allocate away from over valued sectors.

      Stock picking well isn’t that what active managers are supposed to do anyway, you don’t need a DFM to do that.

      You don’t need a DFM (and their fees) full stop.*

      *certain exemptions apply

  2. As ever it is up to the good adviser to select the most reliable active funds. That a passive fund looses less than the index shows that it isn’t tracking properly. So what happens when the index rises? Does it do better or worse? Basically you are not getting what it says on the tin. A tracker is supposed to track as accurately as possible. This article is no recommendation.

    • Where does it say that any index tracking fund lost less than the index it is tracking???

      • FTSE 100; 4434.2 (31/12/07) / 6456.7 (31/12/08) = 31.33% loss.

        So the L & G fund did well however that was achieved.

        The main point to echo Harry is to pick well. Planet earth plc is a closed system and the economy a zero sum game. So for some to gain others must lose. Choose your manager well and be thankful for the trackers as they will be buyers all the way down as your good managers are dumping underperforming overpriced assets ready to buy ‘em back when they are cheep again.

    • Harry, I think you have misunderstood the point of the article. Is to highlight how passive funds do against the relevant IMA sector in a downturn.

  3. Stuart & Harry

    The FTSE100 fell as Rob Wood of Wychwood stated, by 28.33%. You are quite right, Stuart, that the ‘price’ fell by 31.33%, but you have to add in the dividends. To be honest, Harry, the L&G UK 100 Trust tracked the FTSE100 pretty accurately throughout the year. The two charts have a Positive Correlation of 0.95%. There was hardly anything between them throughout the year. There were several periods of ‘minor’ out performance and underperformance over the 12 months with the L&G fund just pushing ahead of the Index by the end of the year by 0.45%. A fortnight before the index was 0.71% higher YTD than the L&G fund. If you look at the performance chart comparing the two together, there is next to no difference really – simple tracking error, which of course you expect.

    Picking your active manager well is clearly a desirable outcome, but I would suggest is much easier in hindsight than advance.

    There is nothing wrong with either investment method really, but emotions start to get frayed when exponents of one type start to criticise the other. If you believe you have a robust way of picking better than index fund managers in advance, that’s great. For me though, I am happy to accept market returns as they are. The FTSE All Share (including dividends) has averaged 11.69pa for the last 61 years and would have turned £100 in 1956 into £85,031. That works ok for me. If you feel active management (the aggregate of which ‘is’ the index) can achieve more, then that’s even better.

  4. Active funds are the drivers of passive indices. Without them, passive indices would be stale and stodgy almost to the point of inertia ~ who, for example, would buy IPO’s? I’m with HK on this one ~ some active managers are better than others and the job of a good adviser is to separate the former from the latter.

  5. I switch off the immediately when I see an active ‘UK all companies’ sector being benchmarked to a FTSE100 bluechip index tracker.

    The passive vs. active can be quite disingenuous IMO given that the total cost of investing needs to be factored in and therefore (for example) an IFA using passives but charging 1% can’t simply sell their services on the basis of the cost of the funds when the comparison is to an IFA who is perhaps charging 0.5% but using active funds.

    Time and again, I’ve seen the cost of active funds being over exaggerated – particularly pre-RDR where a leading sunday broadsheet compared an unbundled passive to a ‘full fat’ bundled active.

    Add in the fact that those investing in active funds aren’t seeking ‘average’ funds which also throws the average measure up for debate.

    There is a place for passives but IMO it’s not one sided despite what many would proclaim.

  6. Julian, this passive utopia is a fallacy. Markets will always be kept efficient by traders.

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