Active Funds: Overpromising and Underdelivering

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10 Jan Active Funds: Overpromising and Underdelivering

The Euro 2016 tournament earlier this year is yet more evidence (if ever there was a doubt) that the English football squad isn’t all that it’s cracked up to be. We may have some of the most talented and best paid players in the world, but in the England team, we have a perfect example of something that keeps overpromising and underdelivering.

The next best example perhaps, is active investment management.

This was confirmed in a recent study by the Financial Conduct Authority (FCA). The study shows, yet again, that actively managed funds are not worth forking out for.

The typical (sometimes abysmal) poor performance of active management overall, has been widely researched and discussed. But to have the financial regulator publicly acknowledge it is a bit like that moment your 5-year-old finds out that Santa isn’t real. You are a little shocked but mostly relieved that you never have to lie to them on the issue again!

The FCA notes:

Overall, our evidence suggests that actively managed investments do not outperform their benchmark after costs. Funds which are available to retail investors underperform their benchmarks after costs – while products available to pension schemes and other institutional investors achieve returns that are not significantly above the benchmark.

Investors may choose to invest in funds with higher charges in the expectation of achieving higher future returns. However, we find that there is no clear relationship between price and performance – the most expensive funds do not appear to perform better than other funds before or after cost.”

Touché!

There is nothing new about this ‘revelation,’ but we are pleased to see the regulator affirms our investment approach at Tandem. We help our clients avoid expensive, active funds that add no value whatsoever. Instead, we recommend a low-cost, globally diversified portfolio designed to meet your long term goals.