Stop bashing active management

If you have been reading the national press in recent weeks you could be excused for thinking the actively managed fund industry was on its last legs.

There have been numerous articles ‘exposing' those high charging funds ripping off clients and they are jam-packed full of quotes from "industry commentators" calling for investors to exit active management altogether.

One problem however is most of the figures quoted in the stories criticising high active management charges have come from groups offering ETF solutions. I wonder why this is...

The active versus passive debate is an important one for all investors and the increasing use of passives before and after RDR is unquestioned.

But cost and performance should not be confused. There will always be actively managed funds which underperform, as there will be those which return more than their respective benchmark.

If funds consistently underperform, it is up to the groups and eventually the adviser to take action. This is a performance issue.

But the adviser has obviously bought into the fund for a reason. If the reason was to simply get exposure to the asset class and they are happy to just use a tracker, fair enough.

However, active management is all about delivering excess returns over the longer-term and performance stats can be deceiving when not put into context.

Here is an example. Richard Buxton's Schroder UK Alpha Plus was hit hard during the credit and financial crisis. The manager underperformed peer group and benchmark in 2008 and the decline impacted his strong track-record. This is going to happen at times in active management.

But here is why investors are happy to pay Schroders a fee and why the fund consistently receives strong inflows. The return for the £2bn Schroder UK Alpha Plus fund since 2002 launch: 133.64%. FTSE All Share over the same period: 20.76%.

Would anyone dare look at Neil Woodford's one-year numbers and question the charges on his funds? Highly unlikely.

Charges are very important and definitely should be a consideration when advisers select funds. However, the furore should not be targeted at single-strategy or multi-manager funds which have higher charges and underperform. It is such an easy target, but totally unnecessary.

Why isn't the debate centred on those funds charging an active management fee but essentially tracking the index? The passive providers should be targeting the investors in these funds, not just simply bashing the concept of active management.

As for ETFs, investors should also be warned to do their homework as having the word ‘ETF' in a product name does not necessarily mean ‘cheap'.

There are a number of examples of ETF-based funds with TERs over what the industry deems to be the standard 1.6%.

Marlborough has a suite of actively managed funds of ETFs, which it believes offers an alternative to traditional multi-manager products. The performance has been solid and the firm is fully upfront with the charges and portfolio turnover.

However, three of the group's four ETF portfolios have TERs of more than 2%. Not exactly cheap.

The media's scattergun approach over the past few weeks has really clouded this issue. This is an important issue, but to hear those who have accumulated obscene levels of wealth out of active management now hitting out at the industry over fees sounds a bit rich to me.