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Active service

Jason Britton
Chief executive
T Bailey

If you put your head above the parapet, you can expect the odd bullet to fly in your direction but somebody has to make a stand.

For years, the poor performance of active managers has been held up by many in the professionally sceptical consumer press (and some advisers too) as evidence that all active management is a waste of money and that investors are better off using cheaper trackers.

We recently analysed the performance after all expenses of FTSE All Share index tracking funds and active funds in the Investment Management Association’s UK all companies sector relative to the FTSE All Share over 15 years. The results were startling. Both underperformed the index but the trackers did worse than active managers. Over 15 years from November 1993, £10,000 invested in the average tracker fund would have grown to £20,000 while £10,000 invested in the average actively managed fund would be worth £21,800.

Proponents of trackers have clearly been underestimating the effect of charges and residual tracking errors. The cumulative impact of this drag could leave a long-term investor seriously disappointed at the point when they need to draw on those low-cost trackers that they invested in after reading articles saying active management was a waste of money.

We have taken some flak for daring to expose the flawed logic of the passive investment fans. For the record, we readily recognise that a great number of active managers are poor and that the advent of exchange traded funds has reduced the costs of modern trackers. We declare that we do occasionally use trackers ourselves for short-term, low-cost access to a market but for long-term investing, you are more likely to be successful using active than passive management and, better still, using a fund of funds.

Our research shows that funds of funds have, on average and after all charges, outperformed single manager funds over five years and that the measure of that outperformance has increased the longer the period studied.

This is largely because a fund of funds manager can pick above-average funds that will deliver superior performance. This is not a random exercise, it is the result of expert analysis, manager meetings and careful vetting.

On top of that, we deliver asset allocation and active management using funds best suited to particular economic circumstances and changing them when these change. Over the long run, this makes a significant difference to performance.

We remain convinced that long-term investors are best served using a fund of funds strategy over the longer term. Regretfully for fans of passive investment, the data supports this assertion too. Do not shoot the messenger.

Jason Britton is chief executive and co-fund manager at T Bailey

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