Active Managed

Despite Financial Services Authority's prohibitions on investments in certain asset classes, the funds in this sector still have a wide-ranging remit. One of the principal concerns revolves around fees and charges: Initial Charges come in at between 5-5.5%, and the Annual Management Charge can be as high as 2%. Theoretically, investors pay these premium fees in recognition of the enhanced returns that their managers could deliver through their skill in deploying a more adventurous style of equity investment.

Volatility broadly tends to follow a risk/reward pattern with the lower returns accompanied by lower risk and vice versa. R-squared indicates a high degree of conformity within the sector, with just 11 funds out of the 130-plus constituency displaying this measure of correlation at less than 0.75.

In relation to risk-reward metrics, as extracted from Financial Express Analytics, investors can expect 40 to 50 funds to outperform both the sector average and the FTSE All-Share index. The key consideration here is the cost in terms of risk that attaches to such performance.

The sector as a whole is vulnerable to liquidity crises experienced across global economies, when active fund managers will find it increasingly difficult to generate alpha in a tumultuous environment.

Previous unsatisfactory results in this sector have lead to the familiar debate over passive versus active management. Academic studies have shown that the long-term historical performance of passive funds, (lower-cost ones that merely track an index, without any intention to outperform it), produce better cost-adjusted returns than active funds, which on average have to work hard to beat the market. This revelation has fuelled the growth of passive funds over recent years, and has led to the conclusion that investors are better off trying not to outperform the market at all, and merely track it, whilst having the benefit of lower costs.

The key for investors is to research and identify those funds that can demonstrate a record of outperforming the FTSE All-Share index, with a total expense ratio that is justified by superior returns, and tight grip on the risk from volatility.