David Kuo: Risk is back – but do choose your fund manager with care

Investment Insider

It seems investors are developing a taste for risk again. According to recent data from the Investment Management Association, record sums were invested in stock-market index tracking funds in the first three months of the year.

Between January and March, we ploughed £824m into index trackers. This helped to lift the total of tracker funds under management to almost £40bn. However, it was the performance of Funds of Funds that stole the limelight. We handed over £1.7bn to fund managers to invest in other funds. This brought the total amount in Fund of Funds to a staggering £60.7bn. The question is why investors would prefer someone to manage their money when there is strong evidence that shows active fund managers rarely beat the market? Standard & Poor's yearly Spiva survey reveals that 49 per cent of actively managed funds were beaten by their benchmarks. With odds that are no better than flipping a coin, why bother?

And the statistics get worse with time. Over three years, 57 per cent of fund managers are beaten by their benchmark indices, and over five years 61 per cent underperform. But there are some exceptional managers, such as Neil Woodford and Anthony Bolton, whose long-term performances give them cult status; £1,000 in Bolton's Fidelity Special Situations Fund at inception, say, would have hit almost £100,000 by the time he left to set up the Fidelity China Special Situations fund.

So how can we identify truly outstanding managers? According to John Chatfeild-Roberts of Jupiter, those that outperform tend to be cynical, sceptical and contrarian. He also has another tip for identifying outstanding fund managers. They have to be hard-nosed, and strong enough to hold their nerve when markets go against them. There is one final tip, which is to avoid funds that spend too much on marketing.

David Kuo is director at investing website Fool.co.uk