Are fund managers starting to beat the market? The active fund management industry has been taking fire for some years from the rise of passive investing and recently a boot from the financial watchdog over fees.
But there is a spot of good news for our embattled fund managers. A note landed in my inbox this week from Tom Becket, of wealth manager Psigma Investment Management, highlighting that an increasing number of UK active funds are beating the market this year.
That, of course, simply means that fund managers are doing the job they are paid to do, but nonetheless for us investors who haven’t entirely bought into the passive investing-only dogma it’s worth a look.
UK fund managers are beating the market this year after a dismal 2016
Psigma looked at the UK All Companies sector (a category it dubs mostly pointless but one the industry is fond of) and found that so far this year, 191 of 264 funds had returns better than the FTSE All-Share. That compares to just 42 out of 259 funds beating the market in 2016.
Becket said: ‘Of course it is premature to state it conclusively, but the first half of 2017 might well have seen the start of a revival or renaissance for active equity funds in the UK.
‘The cynics (me amongst them) would say it was long overdue after a mostly dismal 2016 (and in some places over the longer run), but there are signs that a corner has been turned.’
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So, is this just a flash in the pan, or the start of a trend?
Becket points to a decline in returns, where active funds’ outperformance ebbed away to become underperformance, which started in the wake of the financial crisis.
The arrival of huge waves of quantitative easing pumped trillions of dollars and hundreds of billions of pounds and euros into the financial system and ‘fuelled a rising tide floats all boats rally, where nearly every asset imaginable has gone up in value’.
The tide is now turning, however, with the US raising rates and talking about winding down QE and central banks in the UK, Europe and Japan also at least weighing up taking their foot off the gas.
So what happens next?
Becket reckons the penchant for passive investing will stay strong but we will return to a world where ‘active managers are better rewarded for finding good companies’.
That means that mixing low-cost passive funds with active funds where they can really deliver, could be a wise move.
This makes sense. The problem with the passive vs active debate is that it doesn’t have to be an all or nothing decision.
A belief that index investing is the simplest and most reliable way to tap into the ability of companies to deliver profits from putting money to productive use, doesn’t also mean that you cannot believe that some people are good at picking shares.
The problem is finding those fund managers in advance and hence investors’ tendency to a herd mentality, as they follow big names around and dedicate very little time to looking for smaller funds or new talent.
The difficulty here is working out who is a real rising star and who is just flavour of the month.
We try to play our part in highlighting up-and-coming funds and investment trusts at This is Money – and get our readers an insight into their managers – but there’s more to be done.
That’s why we will soon be introducing a new regular look at managers who might be off-the-radar for most, to help investors decide whether they would do a good job of looking after their money.
As for what makes a good fund manager? That’s highly subjective and is something where doing your own research is essential.
I try to look for fund managers with a clear strategy outlined in an easy to understand way, who have ideas that make them stand out from the market, show a willingness to think differently and a commitment to their investors and lower fees.
Trying to find all that out about someone is tricky though – and even if you can do so, picking an active fund manager will always require a leap of faith.
Do look before you leap though – and consider whether a tracker fund could do the job better.
