Why Active Funds Fail When Markets Fall In Value

Why Active Funds Fail When Markets Fall In Value
Underwater by Andy Deitsch. Why?

All You Need To Know About Passive Investing

This article is part of a series. To view all the articles in the series, click the button below.

All You Need To Know About Passive Investing

Financial Express data reveals that active funds haven’t protected investors as effectively as passive funds when stockmarkets fall.

A Disturbing Perspective On The ‘Active Funds Versus Passive Funds’ Debate

Active Funds Fail To Perform In Downturns

According to research carried out by a Bristol-based IFA and shared with Money Marketing, the average active funds in the UK, US and Global Equity sectors have returned less than the equivalent passive funds over the past 10 years.

This isn’t big news.  After all, we’ve been explaining for years why active funds don’t usually perform as well as passive funds, covered in these three articles:

Discover Why Index-Tracker Funds Are So Popular

Investing Demystified: The Easy Way To Success

The Simple Reason Passives Produce Better Results

What’s more concerning is that this research reveals that in downturn conditions, active funds performed significantly worse than passive funds.

In 2008, the average survived fund in the UK All Companies sector lost 32.02 per cent.  The L&G 100 Index fund, however, lost 27.88 per cent, which puts it in the second quartile and ‘above average’.  Many active funds lost 40 per cent or more in the same year, being ‘below average’.

In 2011, the average survived fund in the Global Equity Sector was down 9.43 per cent.  The L&G Global 100 Index dropped just 3.42 per cent, the Vanguard FTSE Developed World ex UK Equity Index slipped 5.61 per cent, and the Blackrock NURS II Overseas Equity fund fell 6.41 per cent.  In that year, many active funds lost close to, or more than 20 per cent.

Incredibly, the figures in the research didn’t include closed or merged funds, which might well have made the results for active funds even worse.

The adviser who completed the active funds research said:

There are many advisers and consultants that believe active funds protect on the downside, but passive funds do not. Passive is a bull market product only I hear them cry, buy an active fund, pay higher fees and we will protect you from financial Armageddon.  Some funds have significantly protected on the downside but given the above it’s clearly only a small proportion. Therefore the chance of finding the funds you need in advance of a downturn, from the small proportion is nigh on impossible.

Maybe You Should Review Your Active Funds

With continuing volatility in the markets and no end in sight, in the light of the evidence about active funds, it’s worth having a read of each of the articles below.  They were published in September 2016 by FT Adviser, in a series entitled ‘Investing In Passives’.  It looked at these areas:

  • What the passive investing landscape has to offer
  • The rise of alternative ETFs
  • How the fees debate is evolving

Buying Into Less-Common Strategies

Passive products such as exchange-traded funds (ETFs) have traditionally focused on offering exposure to large-cap equity indices, such as the FTSE 100, and more recently to fixed income.  But a growing number of providers have launched passive funds that sit more comfortably in the alternatives investments category – a ‘catch-all’ term for any asset classes that are not traditional equities or fixed income.  Read more...

Strategy’s ‘Sweet Spot’ For Investors

The Rio Olympics was a great celebration of sport. It was also a reminder of just how much of human endeavour, and how much of our natural way of thinking, tends to segregate on a national basis. As with sport, when it comes to investing we also tend to think in national, or at least geographic, splits.  Read more...

No Sign Of Passives Slowing Down As Capabilities Expand

Interest in passive investing strategies has grown in recent months. Figures from the Investment Association show that in July, tracker funds had accumulated £132.5bn funds under management, equivalent to 12.1 per cent of the industry total. This compares to a 10.5 per cent share in July 2015 at £106.9bn funds under management.  Read more...

Beware ‘The Lower, The Better’ Mindset; Investors Should Focus On Other Factors

The increasing popularity of passive investment strategies has rightly highlighted the importance of paying more attention to costs and charges. But too often the mantra seems to be “the lower, the better”. This is too simplistic. Investors would be far better served by focusing on net returns, value for money and whether or not their interests are aligned with those of their investment manager.  Read more...

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