A financial adviser has warned that many investors are paying premium fees for actively managed funds without receiving premium returns, as the higher charges often cannot be justified by performance.
Active vs. Tracker Funds
Most people invest in shares through either actively managed funds, where a human manager selects stocks, or tracker funds that mirror an index like the FTSE 100 or S&P 500. Tracker funds typically charge annual fees of 0.05% to 0.2%, while active funds often charge between 0.5% and 1%, significantly impacting returns.
Martin Rayner, financial adviser at Compton Financial Services, said higher fees could be justified if active funds consistently outperformed trackers, but hard data shows they do not.
Data on Underperformance
Rayner highlighted research from Standard & Poor's Indices Versus Active (SPIVA), which found that in Europe, 97% of active funds underperformed the S&P Europe 350 index over a 10-year period. He stated, "So many investors are paying higher fees for active funds despite the evidence showing that a large majority underperform comparable tracker funds over the long term. In short, many people are paying through the nose for underperformance."
Advice for Long-Term Investors
For investors focused on long-term growth through pensions and ISAs, Rayner emphasized the importance of consistent returns with sensible costs. He recommended tracker funds as the core of a portfolio, noting that they avoid erosion of returns by high fees.
However, Rayner acknowledged that some active funds do beat trackers and can play a strategic role in a diversified portfolio, such as providing exposure to specialist sectors or emerging markets. He said, "This is not about ruling active funds out altogether, but rather using them strategically."
Personalized Portfolios
Ultimately, each investor's risk appetite and financial goals should guide their choices. Rayner concluded, "It goes without saying that each person's risk profile and circumstances are different so every portfolio needs to be constructed on a bespoke basis. What works for one person will not work for another. But it is important that people investing heavily in active funds are aware of what the data shows."
