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Virgin defends track record

As the Isa season moves into its final weeks, Virgin has been resurrecting the active versus passive fund management debate. Having commissioned consultant WM to investigate the merits of both styles, the resulting 24-page report sings the praises of trackers and accuses active funds as often being bad value for money.

The WM report says the average tracker has outperformed 70 per cent of all actively managed funds in the UK all companies sector over the past 12 years.

It also claims that many active funds are, in fact, “closet” trackers which barely stray from the index but are still laden with heavier charges.

Yet it would seem investors are still less than convinced that trackers are superior products. A poll on the Virginmoney website – following an active versus passive debate between M&G&#39s Jeremy Mushens and Virgin&#39s Gordon Maw – saw Mushens emerge triumphant.

Meanwhile, having bet SG Asset Management&#39s Nicola Horlick in 1998 that her UK growth fund could not outperform the FTSE All Share by 2 per cent for three years, Virgin looks set for defeat when the bet expires next month. If Virgin loses, Richard Branson will pay £6,000 to a charity of Horlick&#39s choice.

Nevertheless, Virgin seems relatively unperturbed by its latest setbacks. While research & development manager Martin Campbell admits Virgin was perhaps slightly rash to place its bet with Horlick over three rather than five or more years, the firm still believes trackers are the cheapest and most efficient way to invest in the stockmarket.

In his debate with Mushens, marketing director Maw said: “Active funds cost up to three times more, involve three times as much risk and, as a result, mean you can under or overperform the market. In any five-year period, 75 per cent of active funds fail to beat the market and then you add charges. The funds that beat the market change every year and there is no way that we can know which fund will do it at the point of purchase.

“Trackers give you the market return, that is, historically about 15 per cent a year. If you think you need 16 per cent, then you need to pay active charges. However, the balance of probabilities tells us you will actually get less.”

Maw&#39s argument, supported by WM&#39s figures, certainly appears compelling. Of the 55 funds in the UK all companies sector with a 20-year track record, only 11 (20 per cent) managed to beat the FTSE All Share index after charges.

Furthermore, 42 per cent of active funds have had a mean deviation from the index of between 0 and 3 per cent over the past five years, making them no stronger than trackers.

Aside from performance, the other major advantage boasted by supporters of tracker funds is lower costs. Trackers typically have no or low front-end charges with minimal commission, whereas active funds can have initial charges as high as 6 per cent and annual management charges around 1.5 per cent.

But Mushens was quick to point out that, for every set of statistics produced by Maw, there were more statistics which could prove the opposite. Over the year to February 2001, Mushens pointed out that only 11 out of 53 trackers (20 per cent) beat the FTSE All Share compared with 168 out of 305 active funds (55 per cent).

Looking at a five-year period, only three out of 23 trackers (13 per cent) beat the index compared with 82 out of 251 active funds (33 per cent).

In the debate, Mushens said he was not against the concept of trackers but believed they were of limited use and should only make up a small part of a portfolio.

He said: “M&G has two trackers and I personally have holdings in them. But they work best in efficient markets where people have got information the rest of the market has not. They are not very good for accessing more specialist markets so they do not let me go into areas like emerging markets or TMT or healthcare. In less efficient markets, such as South-east Asia or even Japan, actives have consistently beaten indices.

“This does not mean trackers are bad, just that they work best in efficient markets such as the UK and US. While trackers are typically first quartile over three years plus, there are many active funds which on a rolling five-year basis outperform their indices.”

Although both Mushens and Maw believe vehemently in their own products, the final bone of contention was simply how much should be included of each in a balanced portfolio.

As a supporter of domestic markets, Maw believed almost all a client&#39s funds should be placed in trackers, while Mushens favoured more exposure to global markets through active funds.

Within the IFA market, the figures show active funds are still most highly favoured but many IFAs are coming round to the benefits of trackers.

Michael Philips partner Michael Both says: “I have always felt, contrary to popular opinion, that trackers are not the easy option but a very sophisticated tool for the sophisticated investor.

“I think they have their use but I am not sure it is the one that Mr Branson is advocating.”

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