Doyen of active management Warren Buffett came out this year as supporter of passive funds while the £180bn held collectively by the Local Government Pension Scheme looks set to be headed for passive funds following government proposals designed to cut costs.
As a consequence of the retail distribution review (RDR) a greater clarity in active funds’ fee structures was also met by a wholesale slashing of charges from passive specialists such as Vanguard, which now offers funds with ongoing charges of as little as 0.07 per cent.
The past five years have been characterised by steadily rising markets across most developed market indices from the depths of financial crisis, which boded well for trackers.
But with volatility recently spiking and markets around the world losing up to 10 per cent, the feasibility of passive products to withstand weaker markets and keep with their active rivals has been tested.
Indeed, this is the main charge against passives and in favour of deft active management: the ability to hold up better or even outperform in falling or flat markets.
Here we look at three passive funds that have stood up to the recent market correction while also staying ahead over the longer term in comparison to the majority of funds in their respective sectors.
UK equity income
The UK equity income space is home to some of the most highly respected fund managers in the UK – Neil Woodford, Giles Hargreave, Francis Brooke and Adrian Frost.
However, the £622m Vanguard FTSE UK Equity Income Index tracker has had a solid run since its launch in June 2009, having trounced 83 per cent of funds in the IMA UK Equity Income sector since June 2009 by returning 108.02 per cent.
Performance of fund, sector and index since June 2009
Source: FE Analytics
It also fared well in the recent sell-off in markets that saw the FTSE All Share lose almost 10 per cent over a six-week period.
During this period the fund lost 9.2 per cent while the average fund in the sector lost 9.53 per cent, meaning it beat more than two-thirds of the sector’s members.
Performance of fund, sector and index from 4 Sep to 16 Oct
Source: FE Analytics
It uses the FTSE UK Equity Income index as its benchmark, which comprises the biggest dividend payers in the market.
The fund has an ongoing charges figure (OCF) of 0.22 per cent and its latest yield is 4.4 per cent.
UK All Companies
Similarly, in the IMA UK All Companies sector another £1.5bn Vanguard fund that has stayed ahead of the majority of active funds in the recent sell-off is the Vanguard FTSE UK All Share Index tracker.
Since the market sell-off it is down 9.72 per cent while the IMA UK All Companies sector average shows a loss of 10.43 per cent.
The tracker has better performance than three-quarters of the funds in the sector over the period and beat the likes of the GLG UK Select and Standard Life Investments UK Opportunities funds.
Performance of fund, sector and index from 4 Sep to 16 Oct
Source: FE Analytics
However since its launch in December 2009 it has fared less well, returning six percentage points below the sector average.
Performance of fund, sector and index over 5yrs
Source: FE Analytics
It has an OCF of 0.08 per cent and a yield of 3.12 per cent.
North America
The US is notorious for a dearth of active managers who have demonstrated an ability to consistently beat the index, while its stock market has been one of the best performing equity markets in recent years and stood up the best in the recent sell-off.
According to FE data, only 14 of the 89 funds in IMA North American have beaten the Vanguard US Equity Index tracker over the past five years.
Over this period it has returned 99.9 per cent. This compares with a 83.17 per cent average for the IMA North American sector and a gain in the S&P 500 of 95.98 per cent.
Performance of fund, sector and index over 5yrs
Source: FE Analytics
During the sell-off it has also fared well, beating 80 per cent of the funds in the sector. It lost 4.72 per cent compared to an average loss in the sector of 5.82 per cent.
Performance of fund, sector and index 4 Sep to 16 Oct
Source: FE Analytics
The fund has an OCF of 0.1 per cent and a yield of 1.62 per cent.
