Investors in the IA Technology & Telecoms and UK Gilts sectors would have been better off choosing certain passive funds over every other portfolio in the peer groups over 2015 so far, after two index trackers have jumped the top of their performance leaderboards.
While these are relatively niche sectors, there are a number of others in the Investment Association universe where index-tracking funds have posted first-quartile returns over the year to date – despite many arguing that the high valuations being seen in many markets means an active approach would be the most prudent.
The active versus passive debate has dedicated advocates on each side, with fans of trackers noting that no active manager can consistently outperform over the years while those in the active camp point out passives guarantee underperformance and believe genuine talent can handsomely reward their investors over the long term.
2015 has been a turbulent year for markets, with issues such as geo-political tension in the Middle East and eastern Europe, the Greek debt crisis and looming rate rises in the US and the UK and China’s slowdown prompting a wave of volatility.
While those in the active camp argue that fund managers are best placed to navigate these kinds of conditions, index trackers have been able to beat every other fund when it comes to the Investment Association’s Technology & Telecoms and UK Gilts sectors.
Our data show that the £39.3m Close FTSE techMARK fund, which is overseen by Aleem Siddiqui and aims to track the performance of the FTSE techMark Focus index, has posted a 7.37 per cent total return over the year to date. In contrast, the average member of the sector is down 1.24 per cent.
Performance of fund vs sector over 2015
Source: FE Analytics
The fund’s outperformance this year does not seem to be a one-off. FE Analytics shows it was the best performing fund in the sector in both 2011 and 2012, but it was second quartile in 2013 and third quartile in 2014.
This means the fund is currently first quartile over one, three and five years and is the either the highest or second highest returning portfolio over each of these time frames. Over five years, for example, it has made a 106.77 per cent total return over five years while its average peer is up just 75.39 per cent.
FTSE techMark Focus is an index that concentrates on UK businesses that shows particularly high levels of innovation and investment into research and development programmes.
As a result of this, the fund’s top holdings are Shire, ARM Holdings, BAE Systems, Smith & Nephew and Sage Group. Software & computer services has the largest sector weighting at 21.56 per cent, followed by aerospace & defence at 19.93 per cent and pharmaceuticals & biotechnology at 17.42 per cent.
Close FTSE techMARK has a clean ongoing charges figure (OCF) of 0.79 per cent.
However, not all trackers in the IA Technology & Telecoms sector are topping the return table this year. The only other passive fund in the peer group – L&G Global Technology Index – has fallen 5.39 per cent and sits 12th out of 15 funds.
The other sector where a tracker has made the highest return is IA UK Gilts, with the £100m Vanguard UK Long Duration Gilt Index fund making 2.25 per cent in 2015 to date. Its average peer is ahead by just 0.94 per cent this year.
Performance of fund vs sector over 2015
Source: FE Analytics
Vanguard UK Long Duration Gilt Index, which tracks the Barclays Capital UK Government 15+ Years Float Adjusted Bond Index, was in the first quartile in 2014, in the fourth in 2013 and in the third in 2012. On a cumulative view, it’s top quartile over one and three years, making more than double its average peer over the latter time frame with a 17.56 per cent total return.
The fund is a member of Square Mile’s Academy of Funds, where it has been given a ‘Recommended’ rating. It also holds an FE Passive Fund Rating of two.
Square Mile said: “We believe that Vanguard have a very strong commitment towards managing passive strategies.”
“Our rating on this fund is based upon our opinion of the suitability of the index tracked, the management group's commitment to operating passive strategies, the size of the fund, the fund's cost and good historic record of tracking the index.”
Vanguard UK Long Duration Gilt Index has a clean OCF of 0.15 per cent and yields 2.47 per cent.
Another four trackers are in the sector’s second quartile while the remaining passive member in the third.
FE Analytics shows these are the only two sectors where an index tracker is in the top spot this year, although there are several where passives are in the top quartile.
There is only one passive offering in the IA Mixed Investment 0%-35% Shares sector – Vanguard LifeStrategy 20% Equity – and its 0.28 per cent total return means it ranks 12th out of 48 for 2015 so far. Its outperformance has only come about in the past few weeks, however.
Performance of fund vs sector over 2015
Source: FE Analytics
Likewise, L&G Emerging Markets Government Bond (US$) Index is the only passive in the IA Global Emerging Market Bond sector and it is in fourth place out of 34 after making 2.37 per cent this year.
Other fixed income sectors with trackers in the top quartile include IA Global Bonds (Vanguard Global Short Term Bond Index and Vanguard Global Bond Index) and IA Sterling Corporate Bond (L&G Short Dated Sterling Corporate Bond Index, UBS Sterling Corporate Bond Indexed and BlackRock Corporate Bond 1 to 10 Year).
When it comes to equities, the mid-cap focus of HSBC FTSE 250 Index and BlackRock Mid Cap UK Equity Tracker has pushed them into the top quartile of the IA UK All Companies peer group, where they are joined by L&G Ethical.
Furthermore, L&G Global Health & Pharmaceutical Index and Vanguard Global Small-Cap Index are first quartile in the IA Global sector.