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When Richard Branson made his foray into the world of unit trusts in 1995 with his index tracker, no one questioned his grasp of fund management despite Virgin being better known for taking on the likes of British Airways and Coca-Cola.

Within two years, almost a quarter of a million people had bought the fund and it now has £2.4bn under management. Yet despite Branson’s popularity, Virgin’s index tracker has let investors down and given passive funds a bad name in the UK. The All Share has climbed by 110 per cent (including dividends) since it was launched but Virgin’s UK index tracker has returned just 80 per cent – a difference of 30 percentage points, according to Morning-star, the rating agency used by the company.

One of the main reasons the fund has underperformed so much is cost. Virgin’s fund was launched when a charge of 1 per cent was deemed cheap. But in the world of tracker funds, 1 per cent is expensive and investors are losing out by thousands of pounds because of it.

US giant Vanguard will push the charges’ debate when it launches in the UK later this year. It boasts a TER of under 0.2 per cent compared with active funds that have an average TER of nearer 1.7 per cent.

It says costs really matter for investors and that the difference between 17-25 basis points v 125 basis points is huge because of the effect of compounding these costs.

It is a fair argument and one that Virgin should take note (not that it will care to). Yet despite Virgin’s performance, tracker funds look more and more appealing because active funds disappoint more often than not.

When I joined Money Marketing in 1998, several active managers tried to put me off the scent of tracker funds. Their argument was that passive funds cannot add value but they could.

Of course, the active fund managers’ argument would have been sound had it not been for one issue – most fail to add value. Schroders once said that passive investing forces a manager to invest badly. Sadly, many active managers can do this without being forced.

Even the active advocates admit that decent active managers are hard to find. According to Thames River research, only 10.6 per cent of all unit trusts and Oeics – both active and passive – have managed to outperform their respective benchmarks in each of the past three years.

Some reckon the arrival of Vanguard will intensify competition between active and passive funds and shake up the investing landscape. It will not do anything of the sort. The active v passive debate has embroiled fund management circles for decades and it will continue to do for many more.

For every study that proclaims that index funds are better than actively managed fund, there is one that argues that actively managed funds deliver greater value. Likewise, some IFAs love active funds and some prefer the anonymity of trackers.

But there is another good reason why Vanguard will be hard-pressed to make a huge impact. There are dirt-cheap tracking funds in the UK market already, notably from M&G and Fidelity, with annual fees of around 0.3 per cent.

Indeed, Fidelity got Virgin’s back up in 2005 when it slashed the charge on its tracker to 0.1 per cent, making it the cheapest tracker fund at the time. The fund is barely £400m in size, small fry in the world of index trackers. Virgin need not have worried then and it need not be worried about Vanguard today.

Paul Farrow is digital personal finance editor for the Telegraph Media Group

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