How to locate proactive fund managers who are worth the investment

On average, active funds are unlikely to outperform a cheap tracker, but they may be useful in some markets

The debate over whether to be active or passive has been going on for the last twenty years. Fees are by far the largest problem with active funds. Higher fees for poor performance should never be paid by an investor. Nonetheless, it is a good deal for investors if managers can outperform earning their fees and then some extra.

On the whole, though, it is hard to argue that passive funds outperform active ones. S&P Dow Jones' SandP Indices Versus Active (Spiva) reports consistently demonstrate that active funds have underperformed pertinent benchmark indices over extended periods of time. The S&P 500 has outperformed 64 percent of US-based large-cap US equity funds over the last 24 years. Over a ten-year period, 93 percent of funds in Europe underperformed the S&P Europe 350, while 82 percent of UK funds underperformed the S&P United Kingdom BMI.

Because passive funds are not a perfect, cost-free replica of a benchmark index, the Morningstar active/passive barometer takes a slightly different approach when comparing active funds with passive funds in the same category. However, the outcomes are fairly comparable. The percentage of European active funds that outperformed passive strategies over the previous decade was only 14.2%. Once more, the performance of active funds has been especially bad for large-cap stocks, making it "increasingly difficult to justify their higher fees."

Therefore, identifying the areas in which active managers still have an advantage is crucial. According to Morningstar, for instance, active managers outperformed passive peers in small- and mid-cap stocks. For instance, 33% of managers who invested in US small caps and 36% of investors in eurozone small caps did so.

Even so, this does not constitute a majority of funds. At the very least, though, it implies that investors are less likely to be squandering their time trying to find an enthusiastic manager who can contribute here. Therefore, the case for strategically utilizing active funds in specific markets or industries is stronger.

Standing out.

To demystify this space, a group of former traders from Morgan Stanley and Credit Suisse founded the new fund-comparison website Pickafund. Without having to deal with broker restrictions that restrict which funds are available on each platform, it has been designed to aggregate data on funds from market investment trusts, exchange-traded funds (ETFs), open-ended investment companies (OEICs), and unit trusts. This is particularly useful for smaller, specialized funds.

The comparison of active and passive funds is one of the newest features; it is a page that is updated every day to show how active funds are doing in comparison to their passive counterparts.

Although a ten-year screener is being developed, the data only goes back five years at this time.

The findings imply that investors in well-covered markets are not wasting their time attempting to outperform an active manager. The platform, for instance, has 258 active funds with a five-year track record in the global large-cap sector, compared to 65 passive funds. The average median net total annualized return for active funds is 8 to 6 percent, while the median return for passive funds is 11 to 5 percent.

Even more unexpectedly, exercise caution in emerging markets, where many investors think active managers can easily thrive due to less efficient markets. There are 201 active funds and 40 passive funds in the emerging markets equity category on the platform. On a median basis, however, over the last five years, actives have still underperformed passives by 017% annually.

It is possible that the odds will begin to improve in the least efficient markets. The six active funds that concentrate on Africa and the Middle East have, on average, outperformed the single passive fund by 3 to 95 percent annually over the course of five years. Ten active funds and two passive funds in frontier markets have outperformed by 4.3 percent annually, while active funds with an emphasis on India have outperformed by 2 percent annually. Other categories with a higher proportion of small-cap companies and specialized markets like biotech and alternative energy exhibit comparable patterns.