Active Vs Passive War Spreads To All Asset Classes

A recent article in the Telegraph entitled Man vs Machine: How Woodford Was Beaten By A Computer, got me thinking about which markets advisers choose to invest in passively, which actively, and why. It left me with the feeling that the established logic should be turned on its head, and advisers should be aware of the fact that there are many – and surprising – asset classes where a passive tracker can do a better job.

The numbers in the Telegraph article spoke for themselves: the Vanguard FTSE UK Equity Income Index fund has made 133 percent returns with dividends reinvested since 2009, against 107 percent total returns for the St James’s Place fund managed by Neil Woodford, according to figures from FE Trustnet. It’s hard to argue against that kind of result, especially when you consider that Neil Woodford is one of the most celebrated active managers in the UK.

But let’s cast the net wider, to overseas markets. Why do advisers tend to pick a tracker fund for just U.S. equities? They are truly efficient and not many managers can add alpha, is the line I hear. But with help from FE Trustnet, I’ve outlined examples of passive beating active performance across technology stocks, global emerging markets, China and global bonds. [Data is as of 1 July and is subject to change.]

Technology

Technology stocks have helped to propel U.S. equities to new heights, and have equally been a catalyst for their demise in the dot com crash. In this sector, there is one tracker fund that has beaten every single actively managed fund over the last decade.

The Close FTSE TechMARK fund, from Close Brothers Asset Management, tracks an index of tech-focused shares and has returned 235 percent in 10 years. It does cost a hefty 1.4 percent per annum, but most active managers do not come close to achieving the same performance. The nearest, and admittedly impressive, performer is the Framlington Global Technology fund, which has made gains of just over 220 percent. It is even more expensive at 1.59 percent per year.

FE Trustnet data aside, there is a much cheaper option. The db X-trackers MSCI World Information Technology UCITS ETF (XWND) has returned 78 percent in USD terms since launch in 2010, and it only costs 0.45 percent per year.

Emerging Markets

Advisers often tell me that emerging markets are tricky to navigate and illiquid, and therefore they are willing to place their trust with an active manager, paying higher annual fees for the privilege.

Active managers perpetuate this line by saying that they have “teams on the ground” who can meet the companies and walk around the streets, no doubt picking up snippets of the language and soaking up the socio-economic climate. (I dread to think how many air miles Mark Mobius has clocked up during his career.) But the fact remains that very few emerging market active managers manage to generate enough alpha to justify the prices they charge. Are these managers, in fact, spending more time in the sky than in the office?

However, a favourable example for active managers is the PFS Somerset Global Emerging Markets A Acc, managed by Edward Robertson and Mark Asquith, which has returned 9.88 percent in Sterling terms over three years, and charges an annual total fee of 1.81 percent.

This compares to the SSGA SPDR MSCI Emerging Markets UCITS ETF – the best performer over three years amongst the FE Trustnet-rated ETF universe – which has returned a healthy 14.11 percent over the same timeframe in USD. But the ETF only costs 0.42 percent in headline fees.

China

Two words: Anthony Bolton. Although this active manager became known as an icon in the world of UK equities, he had a disastrous comeback from early retirement as a China stock picker in Hong Kong.

The best performing vehicle within the Investment Association’s China/Greater China sector has returned around 71 percent over the past five years and has hefty annual fees of 1.69 percent– the Threadneedle China Opportunities Ret fund. Whereas the best tracker in the FE Trustnet’s global ETFs sector over the past five years is the db X-trackers CSI3000 UCITS ETF (XCHA), which produced around 72.5 percent over the same period. It charges 0.50 percent per year.

These two funds track different benchmarks so we are not comparing apples with apples, but active managers have a mandate to seek opportunities as they see fit and the ultimate proof in the pudding is their performance and whether they can justify their annual fees.

Global Bonds

Few advisers allocate to fixed income ETFs on the whole, compared to equities, as there are less products available and many of these ETFs take a market-cap weighted approach to ranking bonds, which involves giving the top spots to those issuers with the most debt.

But just tracking a bond index can sometimes reap rewards. Looking at data from Citywire, the average active global bond fund manager’s total return over 12 months to 31 May is just 2.9 percent. Compare that to the db x-trackers II Barclays Global Aggregate Bond 1C UCITS ETF (XBAG) that produced 14.3 percent in euro terms over the last 12 months.