Research questions long-term performance of tracker funds

With the exception of funds tracking the US and UK mid caps, no passive funds have been able to generate first or second quartile performance in their respective sectors over the past 10 years, according to research from Chase de Vere.

Research questions long-term performance of tracker funds


The popularity of passive funds has surged in recent years, with many advisers questioning the higher fees charged by active funds. However, research from Chase de Vere suggests most tracker funds have underperformed their active peers over both five and 10 years, questioning the value they provide.

The research looked at tracker funds in the IA UK All Companies, Europe, North America, Asia ex Japan, Japan and Emerging Markets sectors, and bar the second quartile performance of the HSBC FTSE-250 Index and two US trackers, no fund made it into the top two quartiles over the last 10 years to August 7, according to data from FE Trustnet.

With a strong start to 2017 from global equity markets, investors may well expect active managers to have done well, but Chase de Vere’s Patrick Connolly said their longer-term outperformance puts into question some perceptions regarding passive funds.

“The popularity of tracker funds is due to their low charges and the general perception that this should result in them performing well over the longer-term,” he said. “However, our research shows that this could be an incorrect assumption.”

The only region where a passive approach clearly produced above average performance was in North America. Given its perception of being the most efficient stock market in the world, these findings are hardly a surprise, with few active managers demonstrating a long-term ability to outperform the S&P 500.

So why the underperformance of trackers in other regions? Connolly explained: “In part this is probably because active funds are likely to have a higher weighting in mid and small cap stocks and these should, over the longer-term, outperform larger companies, which will usually be more heavily represented in trackers.”

Indeed, versus the iShares 100 UK Equity Index return of 56.6% over five years, the iShares Mid Cap UK Equity Index rose 100.3%, placing it first quartile in the IA UK All Companies sector.

“There is currently a strong focus on investment fund charges and quite rightly so as many funds charge too much and deliver too little,” Connolly said. “However, our research suggests that funds with lower charges don’t necessarily provide the best value and passive investments are not some form of investment panacea.”