Individual Savings Account uk, Individual Savings Account

18 June 2000

Investors lose millions in failing funds

ONLY two out of 474 British investment funds have consistently beaten the FTSE All-Share index in the past five years, confirming that tracker funds remain the most reliable stock market investments.

According to a survey, the overwhelming majority of unit trusts are seriously underperforming and investors are missing out on thousands of pounds as a result.

Although it has long been known that tracker funds outperform the average unit trust, the sheer scale of the failure of active managers to produce results will be a serious embarrassment to the City.

The research, by Chase de Vere, an independent financial adviser, studied all 474 funds investing in Britain, 109 in Europe, 110 in America and 90 in Japan, over five years. It used the appropriate index in each country as the benchmark, and compared returns before fees - so in reality most funds are performing even more poorly than the research suggests.

In Britain, just two funds - Scottish Widows Environmental Investor and Baring UK Growth - managed to beat the FTSE All-Share index for each of the past five years. Three funds that were launched only four years ago, Leggmason UK growth, UK income, and Deutsche UK Blue Chip have managed to beat the index every year since their inception.

A further 87 funds, less than one in five, managed to beat the index in three or four of the five years. More than 80% of British unit trusts are therefore underperforming - a damning indictment of the industry. More than 70 funds, including popular schemes offered by Prudential, Barclays and Abbey National have failed to beat the index in any of the five years.

The results of the survey are further proof of the reliability of tracker funds - which replicate a stock market index. Economists have long known that active funds cannot consistently beat the index. However, the fund industry, with its huge marketing budget, has managed to convince many investors and advisers that the opposite is true. Martin Campbell from Virgin Direct, which sells the country's most popular tracker fund, said: "This analysis proves that trackers are superior. Higher fees charged by active managers are a waste of money."

When investing overseas, active fund managers have a better record. The survey revealed that five of the 109 European funds beat the FTSE European index every year for the past five years. More than 40 of the funds managed to beat the market in at least three of the years.

However, not a single American fund beat the index in all of the five years, but an impressive 80 of the 110 funds managed to beat the Dow Jones in at least three of the years. Japanese fund managers are the most consistent - with the majority beating the index most of the time. Janine Starks from Chase de Vere said: "There are simply too many funds and too much dross. But, I still believe that active management will be better in the future."

Pressure is now growing on fund managers to introduce performance-related fees. Most currently charge an initial fee of 5%, followed by an annual charge of 1.5%. However, considering that most produce sub-standard returns, such high fees are becoming increasingly difficult to justify.

In America, many fund managers have bowed to investor pressure and introduced the fees. But in this country there is little sign of them following suit. Fidelity charges performance-related fees to its American customers, but has refused to give the same privilege to British investors.

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