While actively managed funds on the whole managed to outperform in 2012 and 2013, a flight to safety has resulted in many being caught out so far this year – particularly in the UK equity sectors.
However, in certain investment sectors passive funds have not only beaten the average active fund – they’ve beaten the vast majority, comfortably.
Certain areas have proven very difficult for investors to add value in, whether it be in highly specialist sectors that require high charges, or more established sectors that are covered by a huge number of analysts.
Here we look at four investment sectors where a passive has dominated from a performance point of view.
Perhaps those looking to get access to their chosen area may be tempted by them, given their lower charges.
Technology
Exposure to technology can provide some of the most rapid growth of any sector, but it can also come with significant volatility, evident in the sharp correction that hit tech stocks earlier in the year.
The Close FTSE Techmark is a tracker fund that has outpaced every fund in the IMA Technology & Telecoms sector over 10 years, and is the second best over three and five years as well.
Over five years it has returned 148.62 per cent, compared to 112.06 per cent from the sector average.
Performance of fund and sector over 5yrs
Source: FE Analytics
It is a top quartile performer over one, three, five and 10 years – an accolade no active fund in the sector has achieved.
One well-regarded tech fund – AXA Framlington Biotech – has beaten the Close tracker over these periods, but it is much more specialist than those in IMA Technology & Telecoms. By and large, the tracker has been an investors best bet in this area.
The Close tracker doesn’t yet have a clean share class, so is more expensive than the average actively managed fund. It has ongoing charges of 0.91 per cent at present.
North America
The US has been one of the best performing equity markets in recent years but is underrepresented by FE Alpha Managers with just three out of 111 funds.
Experts suggest the lack of star managers in the sector is because it every major company is covered by so many analysts, making it very difficult for investors to have an edge.
This is demonstrated by the strong performance of trackers in the sector. According to FE data, only eight of the 89 funds in IMA North American have beaten the Vanguard US Equity Index tracker over five years.
It has returned 124.04 per cent over the period. This compares with 108.78 per cent from the sector average.
Performance of fund, sector and index over 5yrs
Source: FE Analytics
The tracker uses the FTSE USA index as its benchmark, which has beaten the S&P 500 over the period. Still, even trackers that use the latter as its benchmark have outperformed the average actively managed US fund over the period.
Vanguard US Equity Index has clean share class ongoing charges of just 0.2 per cent, making it one of the cheapest funds in the entire IMA universe.
Two other top performing trackers giving exposure to the S&P 500 are two ETFs: ProShares UltraPro S&P 500 and ProShares Ultra S&P 500, which have returned 654.15 and 331.94 per cent, respectively.
Performance of funds and index over 5yrs
Source: FE Analytics
It’s worth pointing out these are not pure passives however. These use gearing and derivatives to enhance performance, while still matching the biggest companies in the index.
Whitechurch’s Ben Willis says playing a macro theme in a stock market that is over-researched suits a tracker fund, pointing to the US as the perfect example.
Mike Deverell, investment manager at Equilibrium and also an AFI panellist, recently told FE Trustnet that he bought a US tracker because he was finding it so difficult to find a manager who consistently outperforms.
UK Equity Income
The UK Equity Income sector is home to some of the most highly respected fund managers in the UK – Neil Woodford, Mark Barnett and Adrian Frost just a few examples.
However, it’s interesting to note that a tracker fund has outperformed the vast majority of its peers since its launch just over five years ago.
The £560m Vanguard FTSE UK Equity Income Index tracker has beaten 87 per cent of funds in the IMA UK Equity Income sector since June 2009, having returned 115.24 per cent.
Performance of fund, sector and index since June 2009
Source: FE Analytics
Among the high profile names it has outperformed over the period include the five-crown rated Invesco Perpetual Income & Growth, Threadneedle UK Equity Income, Schroder Income, Aberdeen UK Equity Income and Artemis Income fund.
Vanguard uses the FTSE UK Equity Income index as its benchmark, which comprises the biggest dividend payers in the UK. It has ongoing charges of just 0.25 per cent. The cheapest actively managed UK Equity Income funds charge around 0.65 per cent.
