However, in some more specialised areas where value is hard to come by, tracker funds have delivered returns well ahead of their actively managed peers – often at a fraction of the cost.
FE Trustnet takes a look at three passive funds that have beaten their peers over the medium- and long-term.
L&G Global Health & Pharmaceutical Index
The tiny L&G Global Health and Pharmaceutical Index tracker is the best-performing fund in the IMA Global sector over three years, and the second best over five, behind the actively managed Schroder Global Healthcare portfolio.
Joseph Molloy’s fund, which tracks the FTSE World Health & Pharma index, has made 46.11 per cent over the last three years while the sector has gained just 20.57 per cent, according to FE Analytics.
It has fallen short of the index though, which has made 52.73 per cent over the period.
Performance of fund vs sector and index over 3yrs
Source: FE Analytics
The L&G tracker is also top quartile over one and five years, with returns of 29.09 per cent and 92.61 per cent, respectively.
Unsurprisingly, the majority of the £72.8m portfolio is invested in North American blue chips such as Johnson & Johnson and Pfizer.
British names such as GlaxoSmithKline and Swiss pharmaceutical giants Roche and Novartis also feature in the top-10 holdings.
The fund is currently yielding 1 per cent.
L&G Global Health & Pharmaceutical Index requires a minimum investment of £500 and has an ongoing charges fee (OCF) of 1.15 per cent, which is quite expensive for a tracker.
However, it is much cheaper than its actively managed rivals.
Invesco Global Healthcare and Schroder Global Healthcare have OCFs of 2.52 and 1.69 per cent, respectively.
Cazenove’s Marcus Brookes, Robin McDonald and Joe Le Jehan are fans of the tracker, holding 10.21 per cent in their £202.8m Cazenove Multi Manager Global ex UK portfolio. No other funds in the IMA universe hold the tracker in their top-10.
Royal London US Tracker
Consistently beating the index in the US has been a daunting task for active managers because the country is so heavily researched.
As FE Trustnet highlighted in a previous article, using a passive portfolio is often a better, and cheaper, way to play the US market.
This £1.8bn fund is one of the most consistent performers in the IMA North America sector over the last half decade, delivering top-quartile returns over one, three and five years.
The fund, which tracks the FTSE USA index, has made 65.43 per cent over the past five years, falling short of its benchmark by just 3.43 percentage points.
Performance of fund vs sector and index over 5yrs
Source: FE Analytics
The fund’s top holdings are Apple, Exxon Mobil and General Electric. It has a nominal yield of 1.22 per cent.
Royal London US Tracker requires a minimum investment of £500,000, but the group is in the process of rolling out its passive range on UK platforms, which will be available to UK investors in the coming weeks.
The fund has an OCF of just 0.24 per cent. No funds hold the tracker in their top-10.
Close FTSE techMARK
The five crown-rated Close FTSE techMARK tracker has been the best-performing fund in the out-of-favour IMA Technology & Telecoms sector over one and 10 years.
Over the last decade it has made 357.15 per cent, more than doubling the returns of the sector, which is up 162.3 per cent.
The FTSE techMARK 100 index, which the fund tracks, gained 339.14 per cent over the period.
The fund is highly correlated to the index over the last 10 years, with a near perfect correlation ratio of 0.98.
The fund is also one of the most consistent performers on an annual basis, behind only the four crown-rated GLG Technology Equity fund over the last 10 years.
It was the best-performing portfolio in the sector in 2003, 2004, 2011 and 2012, and, while its shed more than 25 per cent of its value in 2008, it still protected its capital better than the majority of its peers.
Year-on-year performance of fund vs sector and index 2003 to 2012
| Name | 2012 (%) | 2011 (%) | 2010 (%) | 2009 (%) | 2008 (%) | 2007 (%) | 2006 (%) | 2005 (%) | 2004 (%) | 2003 (%) |
|---|---|---|---|---|---|---|---|---|---|---|
| Close FTSE techMARK | 21.48 | 0.71 | 21 | 40.43 | -25.14 | 8.07 | 5.72 | 19.76 | 17.37 | 57.3 |
| FTSE techMARK 100 | 20.14 | 1.18 | 19.66 | 40.08 | -25.84 | 8.51 | 5.63 | 19.67 | 17.87 | 56.45 |
| IMA Technology & Telecoms | 8.24 | -4.3 | 23.02 | 48.03 | -25.4 | 10.18 | -3.28 | 16.17 | 0.31 | 36.96 |
Source: FE Analytics
In spite of the fund’s strong performance, it is still only £22m in size.
Among its top holdings are British defence giant BAE Systems, Irish-headquartered biopharmaceutical company Shire and FTSE 100 software firm Sage Group.
The fund requires a minimum investment of £1,000, but has a relatively high OCF for a passive vehicle, at 1.85 per cent.