However, investors with different priorities and funds with more sophisticated strategies are harder to benchmark.
Some fund managers don’t track a specific index, believing that it breeds bad habits. It can make a manager doubt his own judgment, as the more he departs from his benchmark, the greater the chance of underperforming.
You can look at it like putting a punt on a horse at the races – you go to the paddock, like the look of the horse, and then walk up to the bookie and realise it’s a 20-to-one shot. So you shy away, instead backing the favourite, and lose out on the gains because you listened to the noise.
Other managers simply don’t feel any index is a fair comparison for what they are trying to do. Those who have capital preservation as a high priority and those who have very strict criteria for stocks in a wide universe fall under this category.
One popular argument for choosing passives is that they offer a cheaper way to achieve the same aims.
If you are looking for growth from equities, why not buy a cheaper passive fund if the majority of active funds won’t beat them over a given period of time?
Whatever the merits of this argument, it can’t apply to the benchmark-free funds that aren’t playing the same game.
Here we look at a few examples of the benchmark-free portfolios that offer you something the passives can’t replicate.
Jupiter Merlin Income
Multi-asset funds are particularly hard to replicate with an index, as are income funds, although this may be changing.
There are a number of exchange-traded funds [ETFs] that track indices of high-yielding stocks. Among these are the Dividend Aristocrat range of funds from State Street, which track S&P’s Dividend Aristocrat indices for the major developed regions.
As for multi-asset passives, this is another area that is coming on, although it stretches the definition of passive.
Funds such as those in the HSBC World Index range hold a basket of passives in line with asset-allocation decisions taken by the managers.
These are obviously active decisions, however, and the charges are currently closer to an active fund than a tracker.
No matter how this area develops in future, Jupiter Merlin Income looks unthreatened at the moment.
The £4.64bn fund has seen the strongest inflows in the IMA Mixed Investment sector this year, thanks to an excellent long-term track record.
It is the second-best performer in the sector over a decade and in the top quartile over three and five years.
Over three years it has made 26.08 per cent while the sector has made 19.98 per cent, according to data from FE Analytics.
Performance of fund vs sector over 3yrs
Source: FE Analytics
Relative performance has been declining, however, and the fund has returned slightly less than the sector over the past year. The fund is now yielding 3.2 per cent, which may not seem high but is a top-quartile figure in the sector.
It is available with a minimum initial investment of £500 and has ongoing charges of 2.36 per cent.
Kennox Strategic Value
This is a very different fund in terms of size and strategy. The £186m fund is an equity fund with a global mandate that is unconstrained in terms of index, geography and sector.
It is run according to a deep-value philosophy, whereby the managers look for businesses they think are so severely undervalued there is little realistic downside.
They then buy and hold for the long-term and are happy to wait for years for the market to recognise the mis-pricing, if necessary.
The strategy has been successful in its own terms, providing decent returns for an equity fund, with much lower volatility.
Performance of fund vs sector over 5yrs
Source: FE Analytics
Over five years the portfolio has returned 86.74 per cent while the average fund in the sector has made 43.76 per cent.
Its annualised volatility over that time is just 10.38 per cent while the sector’s is 16.55 per cent.
Its strategy was most fruitful in 2008 when the fund managed to make 6.38 per cent in equities while the MSCI World lost 17.92 per cent. Investors would not have been able to replicate that performance in a passive equity fund.
The fund is only available to anyone with £20,000 to put in, as the managers say they only want committed, long-term investors.
It is currently yielding 2.13 per cent.
IM Argonaut European Absolute Return
Lots of targeted absolute return funds have been criticised for aiming to beat benchmarks that have set the bar too low.
Many funds measure themselves against LIBOR, which is a low hurdle to beat, even if the funds do have the added aim of making money in all market conditions.
FE Alpha Manager Barry Norris's IMA Argonaut European Absolute Return fund doesn’t take a benchmark at all.
The £2.3m portfolio is a long/short equity fund that focuses mostly on Europe, with a secondary tilt towards the UK.
Data from FE Analytics shows it has made 39.65 per cent over the past three years with a volatility of just 5.94 per cent.
This compares with a volatility of 20.26 per cent for the DJ Euro Stoxx index of the biggest European stocks and returns of just 23.77 per cent.
Performance of fund vs sector over 3yrs
Source: FE Analytics
No passive can replicate the long/short strategy that has allowed it to post such figures.
The fund is available with a minimum initial investment of £500 and has ongoing charges of 2.11 per cent.