Share prices have fallen all over the world due to rising interest rates, the energy crisis and war in Ukraine, hitting pension and ISA investors. At times like these highly paid fund managers should be earning their corn, but once again they are falling short.
Passive investment funds that simply track their chosen stock market index, regardless of whether it goes up or down, have a long history of beating much-hyped active fund managers.
This has been a source of embarrassment for active managers, who earn a small fortune from using their supposed skills to pick the stocks that will beat the market and make investors rich.
Yet history suggests they can’t do it. Year after year, roughly three quarters fail to beat their chosen benchmark, surveys repeatedly show.
Many claimed the long stock market bull run helped trackers as shares prices rocketed across the board, due to low interest rates and endless fiscal and monetary stimulus.
As shares head south, fund managers are still underperforming.
Managers claim they have the skills to protect investors from a stock market slump, by moving into safer investments ahead of time.
In practice, they do just as badly when markets are falling as when they are rising.
As long-standing trends such as rocketing US tech stocks go into reverse, active fund managers should be thrashing machines that simply track the index, but new figures from fund platform AJ Bell show they can’t do it.
It examined performance of 1,000 active investment funds across seven sectors, and found that just 30 percent have outperformed a passive alternative so far this year.
Fund managers buying UK shares did even worse, with just 12 percent of active funds are performing a passive alternative.
This means that investors with billions in active funds have not benefited from the relatively strong performance of the FTSE 100 this year.
FTSE 100 underperformance has been disastrous for UK investors. The UK’s benchmark blue-chip index fell by just one percent in the first half of the year come on making it one of the world’s best performing markets.
Yet the average active fund fell by 13.5 per cent, AJ Bell figures show.
Fund managers did better in the US, where 40 percent outperformed.
Elsewhere, they failed again and again, with just one in five Active Global Emerging Markets outperforming.
Yet incredibly, fund managers charge a premium for their expertise. While the cheapest trackers have no upfront fees and charges as low as just 0.03 percent a year, active funds can impose a five percent upfront fee, plus 1.5 percent a year.
These charges further erode returns.
2022 is shaping up to be another rotten year for active fund managers, says Laith Khalaf, head of investment analysis at AJ Bell.
“Today’s choppy market conditions should favour the flexibility of active funds over the rigid investment strategy of index trackers, but they haven’t.”
Longer term figures suggest that 45 percent of active funds outperformed over 10 years, but Khalaf says that’s still less than half and this figures are flattered by “survivorship bias”. “Unsuccessful active funds tend to wind down or be merged into others, so the very worst fall out of the calculations.”
Active fund manager failings explain the growing popularity of exchange traded funds (ETFs), which track a huge range of global stock markets with rock bottom charges, says Victoria Scholar, head of investment at Interactive Investor.
Well-known UK ETFs include iShares Core FTSE 100 UCITS ETF from BlackRock, with ETF managers HSBC, Invesco, Vanguard and Xtrackers also offering FTSE trackers.
For those investing in the US and elsewhere in the world, iShares, HSBC, Invesco, Lyxor, SPDR and Vanguard offer a host of ETFs.
Now could be the time to take a more passive approach to investing, as being too active fails to pay off.