State Street subsidiary the WM Company says that active investment management strategies outperformed passive strategies in the UK retail market last year. But taken over a longer period – the research is based on the 20-year performance of the trusts (OEICs and unit trusts) in the Standard & Poor’s UK All-Companies sector – the choice of strategy makes no difference, not least because it is hard to find an active manager who is any good at beating the index, as opposed to one who simply costs a lot.
“The choice of an active manager was modestly rewarded in 2003 as the median actively managed trust outperformed its passive counterpart, after management charges, by almost half of one percent,” says Alastair MacDougall, head of research at The WM Company commented. “Over the longer term, however, performance is broadly similar.”
In 2003, UK equities provided their first year of positive returns since 1999, demonstrated by the 20.9 percent rise in the FTSE All-Share index. Similarly, last year, the median actively managed trust in the S&P All-Companies sector gained 20.3 percent, after management charges, while the median return for passively managed FTSE All-Share tracker funds was 19.9 percent.
The real difference between the passive and actively managed approaches can be gauged from the range of returns available. Over 2003, the difference between the highest- and lowest-performing active trusts was 61.2 percent. For the FTSE All-Share tracker funds, it was 3.3 percent.
The performances of the trusts were compared on a bid-to-bid basis with net income reinvested. “Over the long term, the average tracker should outperform the average actively managed trust as charges are lower,” says MacDougall. “But some investors will always benefit from active management. The dilemma facing the individual investor is selecting an active manager who will outperform. The performances of actively managed trusts are, with few exceptions, inconsistent. The chance of choosing an active manager who will outperform over the long-term has to be off-set against the relative predictability of a tracker trust.”
Of the 44 actively managed trusts with a 20-year performance history, eight out-performed the FTSE All-Share index, highlighting the difficulty of identifying which trusts will be the long-term winners.
“Arguably, investors’ equity positions should encompass elements of both,” MacDougall says. “The tracking element will provide market returns and risks while the active element should be targeted where added value is perceived to be available.”