Out data shows that a portfolio of actively managed UK All Companies and UK Equity Income funds that use the FTSE All Share as their benchmark has beaten the average All Share tracker by almost 9 per cent over a 10-year period.
Performance of UK equity funds vs trackers over 10-yrs
Source: FE Analytics
Of the 13 All Share tracker funds with a sufficient track record, only two – Henderson UK Index and Scottish Mutual UK All Share Index – have managed to beat the average actively managed UK equity portfolio.
UK funds that aim to beat their benchmark also come out on top over three and five years, though the margin of outperformance is much smaller – 0.04 and 0.12 per cent respectively.
While the proponents of trackers point to the underperformance of the average actively managed fund due to the corrosive effect of charges, our research shows that a passive fund will not necessarily match the performance of its benchmark.
A number of All Share tracker funds haven’t even come close to emulating their index. Over a 10-year period, Aviva UK Index Tracker, L&G (N) Tracker, Threadneedle Navigator UK Index Tracker and Virgin UK Index Tracking have all underperformed the FTSE All Share by more than 14 per cent. The five portfolios have combined assets under management (AUM) of almost £4bn.
Performance of FTSE All Share tracker funds vs index
| Name |
3-yr returns (%) |
5-yr returns (%) | 10-yr returns (%) |
| FTSE All Share |
54.53 |
6.25 |
64.62 |
| Average active UK equity fund |
51.74 |
0.41 |
62.37 |
| Virgin - UK Index Tracking |
49.94 |
1.4 |
50.6 |
| Threadneedle - Navigator UK Index Tracker |
52.4 |
0.82 |
47.85 |
| L&G - (N) Tracke |
51.18 |
0.52 |
47.29 |
| Aviva Inv - UK Index Tracking |
48.11 |
0.45 |
47.27 |
Source: FE Analytics
With the exception of Aviva UK Index Tracker, all four have a total expense ratio (TER) of more than 1 per cent. A recent FE Trustnet study highlighted the sector-leading Trojan Income fund, which has a TER of 1.06 per cent, as one of the best value-for-money actively managed portfolios on the market.
The issue of cost is only contributory however. According to FE data, both the Aviva UK Index Tracking and Virgin UK Index Tracking funds have a tracking error of more than 4.5 per cent over three and five years, and around 4 per cent over 10 years. These figures are higher than those for a number of actively managed funds.
"While a passive fund can be a good option for cost-conscious investors who want exposure to markets in a quick and easy way, it is important to remember that these products don’t take all the risk out of an investment," said Richard Troue, analyst at Hargreaves Lansdown.
"The effects of cost and tracking error mean that essentially they guarantee underperformance. There’s a misconception that active funds are expensive and trackers are cheap, but this simply isn’t true."
"A number of top-rated UK funds out there have a TER of between 1.2 and 1.8 per cent, which isn’t that much more than a lot of passive funds out there."
According to FE data, the average five crown-rated portfolio across the UK Equity Income and UK All Companies sectors has a TER of 1.61 per cent.
"A lot of funds in their infancy, and those with very little under management, tend to have far higher TERs, while the larger funds with more established track records tend to be cheaper," added Troue.
Nigel Thomas’ AXA Framlington UK Select Opps fund, Mark Slater’s MFM Slater Recovery fund and Francis Brooke’s Trojan Income portfolio are among those with a TER under 1.6 per cent.