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UK equity funds ‘no better than FTSE tracker blend’

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Small and mid-cap companies have driven the performance of UK active funds over the past five years, and these managers have done little to differentiate themselves from a blend of tracker funds, research by online wealth manager SCM Direct suggests.

The findings show that more than 100 per cent of the outperformance of funds in the UK All Companies sector was due to a bias to small and mid-cap stocks.

These outperforming funds had an average of 53 per cent in UK large caps, significantly lower than the 70 per cent of the UK stockmarket they represent, and 47 per cent invested in small and mid-caps, which account for 30 per cent of the UK market.

Effectively the performance of the UK All Companies sector was equivalent to an investment of 55 per cent in a FTSE 100 tracker and 45 per cent in a FTSE 250 tracker over the five years to the end of June, the research suggests.

Meanwhile, in the UK Equity Income sector 85 per cent of the outperformance of UK equity income funds over the past five years was due to a similar size bias.

SCM Direct co-founder Gina Miller says: “Our research is yet another nail in the coffin of the majority of active funds. Simply buying a combination of a FTSE 100 tracker with a FTSE 250 tracker, closely resembles the performance of a typical actively managed UK equities fund.”

She adds that using blended trackers would also save more than 80 per cent of the annual cost, based on a trackers charging approximately 0.15 per cent annually compared to a typical UK active fund charging approximately 0.85 per cent.

Miller also warns the bull run of small and mid-cap stocks has pushed prices up compared to large caps, which could affect fund managers’ returns in the UK All Companies sector.

She says: “Following the outperformance of small and mid-cap stocks, many of these stocks now command a premium valuation, compared to their larger peers.

“This may negatively impact the future returns of many active funds in these two major sectors.”

SCM Direct analysed all of the funds in the UK All Companies and UK Equity Income sectors, reviewing monthly data to ascertain the percentages invested in large caps, mid caps and small caps, as well as conducting an in-depth study into 179 funds in the two sectors with a five-year track record.

The wealth manager found that when the effects of the small and mid-cap bias was stripped out the outperformance for UK All Companies funds disappeared entirely and nearly disappears for UK Income funds, while just four of the funds beat the market cap adjusted returns of their fund over five years.

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Comments

There are 2 comments at the moment, we would love to hear your opinion too.

  1. “Our research is yet another nail in the coffin of the majority of active funds. Simply buying a combination of a FTSE 100 tracker with a FTSE 250 tracker, closely resembles the performance of a typical actively managed UK equities fund.”

    Ah, so somebody was responsible for selecting the split between large cap and small & mid cap companies (which provided the outperformance) ….. that’ll be the active manager won’t it!

  2. I’m not sure what Gina is suggesting here. Did active managers randomly select those weights, or choose to be overweight in those areas without Gina’s benefit of hindsight? If the latter, then the tracker argument is weak – you had to have the asset allocation foresight, then the selection of trackers. Does she have evidence that a cohort of portfolio managers indeed made those calls and bought trackers accordingly? I’d like to see who did and their results if she wouldn’t mind sharing it. Is she suggesting that asset allocation calls are easy and hence you don’t need stock selection? You’d need a deeper analysis than is implied in the piece above to illustrate that.

    Finally, be careful with data. It is true that the FTSE 250 and Small cap indices have outperformed large cap (ie FTSE 100) for the last 5 years. But the FTSE 250 has been doing that since 1999. Hardly a revelation.

    It’s easy to appear smart after the fact.

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