We created a portfolio of tracker funds and ETFs covering the main asset classes and markets: the UK, North America, emerging Asia, the corporate bond sector and gold.
The funds used were those selected yesterday by Shaun Port, chief investment officer of Nutmeg, or the closest equivalent if they were not available three years ago. These were: Vanguard FTSE UK All Share, SSgA North America Equity Tracker, iShares MSCI AC Far East ex Japan, iShares Markit iBoxx GBP Corporate Bond and ETFS Physical Gold.
Each fund was given an equal 20 per cent weighting and its performance was tracked over three years.
Performance of portfolio over 3-yrs
Source: FE Analytics
The portfolio would have made 32.5 per cent over that time, beating all but three of the 518 funds classed as funds of funds by FE Analytics.
Our data shows that the average fund of funds has returned 16.53 per cent over three years – just over half that made by the portfolio of passives.
Only Jupiter Monthly Income, Unicorn Mastertrust and NFU Mutual UK Equity Income made more, and the last two of these both invest almost exclusively in equities.
Top-performing funds of funds over 3-yrs
| Name | Performance (%) |
|---|---|
| Jupiter - Monthly Income | 36.75 |
| Unicorn - Mastertrust | 34.19 |
| NFU Mutual - UK Equity Income | 32.8 |
| FE Trustnet Passive Portfolio | 32.28 |
| M&G - NAACIF | 30.99 |
| IFDS - IM Octopus UK Equity | 30.04 |
| HL - Multi Manager Income & Growth | 29.62 |
| Cazenove - Multi Manager UK Growth | 29.58 |
Source: FE Analytics
The fund of passives portfolio is significantly cheaper than all of the funds of funds in the IMA universe, with a total expense ratio (TER) of 0.48 per cent, according to FE data.
Splitting the portfolio equally helps reduce the possibility of bias creeping in to the selection, although investors will in reality, of course, shift the weightings or add to them to reflect their attitude to risk.
We have tried to make as basic a choice as possible, without using any knowledge of how the previous three years have gone. This selection of sectors is open to criticism, of course.
There is no Europe or property, but then few people wanted to buy those sectors at that time. Japan also doesn’t feature, but that is another sector with few admirers.
Another area that may be questioned is the choice of an Asian fund rather than an emerging markets fund.
Asia Pacific is a far more popular area with UK investors than IMA Global Emerging Markets, attracting significantly more in inflows.
IMA Asia Pacific ex Japan has 83 members, with combined assets under management (AUM) of £58bn, while IMA Global Emerging Markets has 67 members, with combined AUM of £40bn.
Moreover, the MSCI AC Far East and MSCI AC Emerging Markets indices have returned almost the same over the past three years, with the emerging markets benchmark making slightly more.
Performance of indices over 3-yrs
Source: FE Analytics
If the Vanguard Emerging Markets Stock Index is substituted for the Asia tracker, the fund of passives portfolio returns only 2.15 per cent less than the 32.38 per cent figure.
As well as our selection of asset classes, investors need to consider the lack of a track record for many passive products.
We were unable to use many of Shaun Port’s original selections due to their lack of a three-year track record, while only two of the funds used – iShares Markit iBoxx Corporate Bond and SSgA North America Equity Tracker – have a five-year history.
This means performance cannot be tracked through the crash of 2008 when, in theory, active managers had the ability to change their asset allocation to protect their portfolios.
Nonetheless, our research suggests that a portfolio of passive funds can provide powerful performance and diversification with low volatility, making them attractive for those who dislike the cost of multi-managers.