Fans of tracker funds argue that active funds are much riskier than passive vehicles because with the latter there is chance of human error bringing about underperformance, whilst trackers offer the guarantee of average performance.
However, the latest FE Trustnet research suggests many trackers are more volatile than their active counter-parts.
The study focuses on the UK All Companies sector since FTSE All Share tracker funds are the most popular among UK investors.
According to data from FE Analytics, there are 36 index trackers within the sector. The HSBC FTSE 250 Index fund is the most volatile with an FE Risk Score of 114, while the Scottish Widows UK Tracker fund is the least volatile. Its FE Risk Score is 91. The average tracker fund has a score of 101 while the average UK All Companies fund has a score of 98.
There are 76 actively managed vehicles available in the UK All Companies sector that offer a lower FE Risk Score than the average tracker. Many of these are conservative investments which aim to preserve investors’ capital; a feat which, according to Chris Spear, managing director of Spear Financial, trackers cannot do in a bear market.
“I saw a client recently who was historically a fan of passive tracker funds,” he says. “Whilst I see the benefits of their simplicity and low charges, I have generally thought that though they perform in line with other funds in rising markets, they are likely to lose out in falling markets.”
“In a bear markets passive funds can only follow the market downwards whereas an active manager can make the difficult decisions about where to find value and have the potential to preserve capital.”
FE Risk Scores calculate risk relative to the FTSE 100 index, and are more responsive to recent rather than long-term trends. The FTSE 100 has a fixed FE Risk Score of 100.
Liontrust Special Situations has a risk score of just 84 but is the fifth best performer in IMA UK All Companies over five years with returns of 66 per cent compared to 6 per cent from the sector average.
Performance of fund vs sector over five years
Source: FE Analytics
Headed up by Anthony Cross and FE Alpha Manager Julian Fosh, this highly regarded fund focuses primarily on small and micro-cap stocks with some large cap exposure.
The CF Walker Crips UK Growth fund, headed up by FE Alpha Managers Jan Luthman and Stephen Bailey, has risk score of 96 and is in the top quartile for performance over ten years with returns of 123 per cent.
For investors happy to take on a little more risk, Fidelity Special Situations has risk score of 108 and is third best in its sector over 10 years with returns of 154 per cent.
The highly regarded MFM Slater Growth fund has risk score of 108 and is third best over five years with returns of 101 per cent.