In waste bins/junk mailboxes of journalists, analysts and fund researchers everywhere you will find untold amounts of quantified analysis that proves what you already suspected a group of, say, UK equity fund managers would say – the UK is great, equities are great, their funds are great.
But a couple of recent pieces of research caught my eye as they seem to be saying that when it comes to UK equity investing, IFAs are better off going down the active route not the index route. To me this seems to contradict perceived wisdom about market efficiency and the attraction of index-trackers when it comes to the larger more mature equity markets like the FTSE.
Stats v sentiment
Performance: according to a report from Lipper, active fund managers show a higher level of performance when running equity funds invested in the UK.
Sentiment: but, according to research by Legal & General Investments, one of the top three index fund recommendations by IFAs is…UK equities.
The report from Lipper is supported by stats that show an average of 42.1% of equity funds domiciled in Europe outperformed in one-year rolling periods from 31 December 1991 to the end of December 2011. This average performance drops markedly for three- and ten-year rolling periods, though over a ten-year rolling period, looking at single countries, 47.7% of UK funds beat the benchmark.
Picking the right active UK equity manager would, therefore, be the sensible way to invest in UK equities.
But back to Legal & General Investments. Its research found that of those IFAs looking to increase their passive fund recommendations, four out of five would recommend UK equity funds.
Confusingly, this was followed up by managing director Simon Ellis saying: “It is encouraging to see that advisers are looking past UK equities and using index funds to access overseas equities, especially emerging markets.”
As the MD of a massive index-tracking house, what he means, I am sure, is that it is great that IFAs are using trackers for their UK exposure but that they are not limiting themselves to just the UK.
This is where the two pieces of research cross, as both agree index tracking is the way forward for emerging market and US equity exposure.
Business as usual
Ed Moisson, head of UK and cross-border research at Lipper, explains that active fund managers’ level of outperformance is comparatively weak when it comes to investing in Asia Pacific ex Japan and the US.
The IFAs that Legal & General surveyed also had emerging markets and the US on their lists of index-tracking exposure they would increase.
So what does all this mean for portfolio builders?
The same as it has always meant – that actively managed UK equity funds on average will probably just out-perform their cheaper index-tracking counterparts who, by definition, will never beat the index.
The good thing for investors is that there are plenty of actively managed UK equity funds that are considerably above average, the actively managed L&G UK Alpha Fund among them.
Do you think L&G or Lipper are closer to the truth? Let us know below.
