With just a few weeks to go until the ISA deadline, the fund industry is busy persuading us how to invest our annual allowance.
Here, for example, is a list of Fidelity’s Investment Director Tom Stevenson’s latest fund picks:
- Artemis Global Emerging Markets Fund
- Fidelity Global Dividend Fund
- Fidelity Select 50 Balanced Fund
- Liontrust UK Growth Fund
What should investors make of Tom’s favourite funds? You may have noticed that all are actively managed funds, as funds recommended by product providers tend to be. So, should investors be looking for cheaper passive alternatives?
First, let’s look at performance. I asked Mark Northway from Sparrows Capital to check how each of these funds has performed relative to passive funds with similar exposure.
“If you compare Artemis Global Emerging Markets with, say, the iShares Core MSCI Emerging Markets IMI UCITS ETF, the Artemis fund outperforms on an absolute basis over both three and five years. This is mainly due to its overweighting in China.
“The Liontrust fund outperforms the SPDR FTSE UK All Share UCITS ETF over three and five years.
“The returns of the Fidelity Global Dividend Fund and the Vanguard FTSE All-World UCITS ETF are pretty much in line.
“And although the Fidelity Select 50 Balanced Fund has underperformed the Vanguard LifeStrategy 60 Fund to date, that’s only over one year, so there’s not enough data to draw any conclusions.”
A big “But”
In terms of performance, then, Tom’s funds have the edge. But fund providers almost always recommend funds that have performed well in the recent past.
A fund’s past performance actually tells us very little. If anything, the fact that a fund has performed strongly in recent years makes it more likely that it will revert to the mean in the near future.
The importance of cost
Research by Morningstar has shown that the single most reliable indicator of future fund performance is cost. In other words, the less you pay to invest, the higher your returns are likely to be.
Expressed as percentages, management charges seem small. But, compounded over time, they can have a significant impact on net returns.
The Ongoing Charges Figure, or OCF, for Tom Stevenson’s picks range from 0.89% for Liontrust UK Growth to a whopping 1.24% for the Fidelity Select 50 Balanced Fund.
Here are some very much cheaper alternatives to each of Tom’s picks, with the OCF in brackets, starting with the least expensive.
- iShares Core MSCI EM IMI UCITS ETF (0.18%)
- Vanguard Emerging Market Stock Index Fund (0.23%)
- Legal & General Global Emerging Markets Index Fund (0.33%)
- Vanguard FTSE All-World High Dividend Yield UCITS ETF (0.29%)
- Lyxor SG Global Quality Income NTR UCITS ETF (0.45%)
- iShares Stoxx Global Select Dividend 100 UCITS ETF (0.46%)
- Vanguard LifeStrategy 60 Fund (0.22%)
- Legal & General Multi-Index 5 Fund (0.31%)
- Vanguard UK All Share Index Unit Trust (0.06%)
- iShares Core FTSE 100 UCITS ETF (0.07%)
- Legal & General UK Index Trust (0.10%)
When you buy an active fund, you’re not buying outperformance but the possibility of outperformance. Over the long term, only a tiny proportion of actively managed funds beat the relevant index after costs.
Nobody has a crystal ball. But one thing you can control as an investor is how much you pay. In the long run then, opting for a low-cost index tracker is the rational choice.
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