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Adviser Fund Index: Settling the score

Research from Standard & Poor’s last week supplied more firepower to the supporters of passive fund management.

According to S&P’s indices versus active funds scorecard for 2008, the majority of actively managed funds were beaten by their indices between 2004 and 2008.

The study, which used data from the Center for Research in Security Prices, found that some 66 per cent of US equity funds failed to match the return of the S&P composite 1,500 index over the period.

Almost 72 per cent of large-cap funds underperformed the S&P 500, compared with 53 per cent in the previous five-year cycle.

S&P says that its research also dispels the “enduring myth” that active management is superior during bear markets, because of a manager’s ability to move quickly into cash or defensive securities.

The scorecard found eight of the nine equity management styles underperformed their indices in 2008. Large-cap value funds provided the only highlight – just 22 per cent were beaten by their benchmarks.

However, a quick glance at the Adviser Fund Index shows UK advisers are still reluctant to embrace the passive approach. AFI rules prevent the selection of exchange traded funds but exposure to index trackers is also limited.

Just two such products – L&G all stocks gilt index and L&G all stocks index linked gilt – appear in the balanced and cautious indices, each selected by single advisers.

Chelsea Financial Services managing director Darius McDermott, an AFI panellist, says Legal & General offers the best range of trackers for UK investors but he does not hold passive funds in his portfolios. He prefers low-risk managed funds such as Miton special situations as core investments.

“The recent Barclays equity gilt study showed that investors suffered a lost decade for equity returns,” says McDermott. “If I had bought a tracker 10 years ago I would have made no money and I would have paid 50 basis points for the privilege.

“Out of 2,000 unit trusts, 10 per cent, or maybe 20 per cent, outperformed. Underperformance is too prevalent, but if you have the right managers – people like Neil Woodford, Nigel Thomas and Tom Dobell – you can make money.”

Not all the panellists are disciples of active management. Ian Shipway, managing director of Bluefin Wealth Management, was converted to the benefits of long-term passive investing with the arrival of Dimensional in Britain, five years ago.

For UK equity exposure, Shipway allocates between Dimensional’s UK core equity, UK small companies and value funds – all of which appear in the AFI indices. The approach has paid off, he adds, with outperformance relative to the aggress- ive index in both bull and bear market conditions.


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