Beware of the `index busters'
Still wondering about a PEP? Catherine Barron takes issue with the claims made by some managers
Sunday 31 March 1996
First, that it is a jolly good idea to hold some shares, rather than keeping all your savings in the building society. Records of past returns support this: over longer periods, returns from shares have beaten inflation far more successfully than has the savings account.
But then the investment company will go on to tell you that his service is better than another company's. It will parade before you its investment team's experience, expertise and excellence; and it will demand a professional's fee. This could be thought cheeky, because there is evidence to suggest that most fund managers do no better than a monkey with a pin. Hardly any succeed in matching even what seems like a moderate target, the average return off the stock market. In the UK this is measured by the FTSE-A All-Share index.
Looking at the most common type of investment fund for savers, the general UK unit trust, not one managed to beat the index in the year to March. That is out of a total of 134 funds. Over five years, only five out of 117 trusts in this category succeeded in beating the index.
The best returns tend to come from index-tracking funds, which aim to match the performance of the stock market rather than claim to be able to beat it. These charge the investor much less, in part because they are run by computers. While pounds 100 in the average general unit trust made you pounds 17 in the year to March, the Gartmore UK Index unit trust, an index tracking fund, made pounds 27, only pounds 2 less than the index.
The managers with the best records will retort that the really intelligent ones can beat the index. But few of them can show enough consistency for comfort. Investors Chronicle, the weekly stock market magazine, recently examined all the unit trusts in the growth-oriented UK category that beat the index in the last six months. To be kind to the fund managers, we ignored initial charges: 72 out of 151 funds beat the index, on figures from the performance measurers, Micropal. We then took the 42 that had a nine-year record, and found that only five had outperformed the index in more than half the six-month periods in that time.
Among the best five was Fidelity Special Situations, managed by Anthony Bolton. "I passionately believe in active fund management. If I didn't, I wouldn't be doing it," he says. Mr Bolton's fund beat the index in 13 out of the 18 six-month periods. However, even here, the laws of probability take some shine off this. Probability says that in a sample of 40 managers picking stocks at random, two should beat the index 13 times out of 18 anyway. Mr Bolton's fund is one, Pembroke Growth the other.
An academic theory called the "efficient market hypothesis" supports this view that fund managers who beat the average return do so by chance. It says that in developed stock markets, such as the UK's, there are so many professionals digesting information that it gets almost instantly into the share price. No fund manager can often be in the position of finding valuable information and acting before everyone else. The theory draws evidence from the performance of fund managers, and also from mathematical studies of price movements.
If the efficient market theory does hold true for the UK stock market, then PEP investors could well be best advised to opt for index-tracking funds. The one with the most accurate tracking record is Gartmore's. Legal & General runs the cheapest, with no initial charge and a 0.5 per cent annual fee. That compares with the active funds, which tend to charge 5 per cent initially and 1 to 1.5 per cent a year.
q Catherine Barron is personal finance correspondent at `Investors Chronicle'.
Is your name now 'banned' in Saudi Arabia?
Oscar Pistorius trial: Photographs of Paralympian splattered in blood shown in court
Seth Rogen compiles list of all the celebrities he’s got high with
Missing Malaysia Airlines Flight MH370: Satellite ‘pings sent five hours after contact was lost' the only clue in hunt for £160m plane
Missing Malaysia Airlines Flight MH370: New radar evidence suggests missing plane may have been hijacked
Katie Hopkins continues campaign to become Britain's most hated talking head with poorly timed Bob Crow tweet
No EU referendum under Labour: Ed Miliband to reveal that vote on membership is ‘unlikely’ in next Parliament if party wins power
Grace Dent: Who cares if she spells it Barraco Barner? Gemma Worrall is more employable than some bookish arts graduate
Europeans have ‘got whiter’ due to natural selection in past 5,000 years, scientists say
Fracking is turning the US into a bigger oil producer than Saudi Arabia
The rise of Ukip: Study warns Labour that Eurosceptic party's electoral base now 'more working class than any of the main parties'
- 1 Is your name now 'banned' in Saudi Arabia?
- 2 Best films on Netflix: 32 movies that will put an end to your scrolling
- 3 Saving a crushed egg with tape and glue: Why you should care about the kakapo
- 4 Istanbul protesters take 'Ellen selfie' from the back of a police van
- 5 Lady Gaga has struggled with eating disorders in the past, so it's indefensible that she's glamourising bulimia in her SXSW set
iJobs Money & Business
£35000 - £43000 per annum + Bonus and Benefits: Harrington Starr: A global lea...
£50000 - £60000 per annum: Harrington Starr: Linux Systems Administrator - UNI...
£32000 - £36000 per annum + generous benefits: Pro-Recruitment Group: * TAX * ...
£37000 - £40000 per annum + £20000 benefits package: Pro-Recruitment Group: **...