Why do we still bother with active funds?

Have you looked at your investments recently?

I have sympathy for chair investors who don't want to see how badly their investment has been affected by the current market turmoil. Some research made me pay attention this week.

Almost two-thirds of actively-managed equity funds fell further than the market in the first half of the year.

You read that correctly. Actively-managed funds, where you pay extra for a team of well-remunerated fund managers to cherry pick stocks they think will perform better, have outperformed cheaper passive funds that simply track the nearest comparable index.

In a year where markets have been falling, you might have expected active fund managers to perform better.

The report shows the opposite is true when it comes to the performance of actively managed equity funds.

In the UK, only 12 percent of active funds were able to beat a passive alternative.

The average active fund in the UK returned less than 4% in the first half of the year, while the average passive fund returned less than 2%. You would have lost money but investors would have lost less.

The average UK passive fund performance has been flattered by the FTSE 100 which is heavily skewed towards big oil and commodities The typical UK active fund is overweight in large caps. As fears of a recession grow, the performance of UK fund managers has been hit, with a bias towards small and mid-cap stocks.

40 per cent of US equity funds have beaten their passive equivalents so far this year, compared to 19 per cent a year ago.

The average return for both was negative, but the absence of big tech was the main theme of the top performing active funds.

The US equity income funds from Quilter and BNY Mellon have both achieved over 6 per cent, according to data from Morningstar.

If you look under the bonnet of these funds, you will find oil majors such as ExxonMobil, financial services companies, and defence stocks.

In the UK, the two best-performing active funds (Invesco UK Opportunities and Jupiter UK Special Situations) are both heavily weighted towards the oil and gas industry.

The latest data from the Investment Association shows that we are more likely to put our money into US equity funds than we are into UK funds.

Younger investors seem to be especially prone to this.

I follow several accounts where new investors offer their portfolios up for analysis and they often comprise entirely of single stock investments in companies like Facebook and Apple.

Since the beginning of the year, these tech giants have collectively plunged by 31 per cent, which is quite a lesson in why it pays to be diversified.

I would urge investors in their 20s or 30s to consider the "little and often" approach to making automated monthly investments in some quality passive funds.

Robin Powell is the founder and editor of the Evidence-Based Investor website. He believes that the investment industry rarely promotes index funds because it makes more money out of selling actively managed ones.

You can explore our in-depth data and comparison tools when you visit the Hub.

It's more exciting to read about active funds. Terry Smith, James Anderson, Nick Train and Neil Woodford are some of the fund managers who are well known to investors and the financial press. Recent events show that even the biggest beasts can't keep beating the markets forever.

Is it a good idea for investors to bother with active funds?

The number of active funds that beat the market increases as time goes on, with 45 per cent of active funds beating the market. As unsuccessful funds wind down or amalgamate with others, this is flattered bysurvivorship bias.

If you have held Fundsmith, Baillie Gifford or Lindsell Train funds for a long time, the recent dip will have come after a long period of great returns. The table shows that the success of active managers isn't uniform.

I have a few active "rocks" where I have conviction in the ability of the managers to beat the market.

I like trying, my exposure is limited to a certain quota of my portfolio, and I review my fund holdings every six months or so.

"If you want to take a mix and match approach, be picky about the areas where you go active."

The investors should be prepared to make an active choice. Passive funds are now included on most fund platforms' best buy lists.

The most expensive tracker fund in the UK is 21 times more expensive than the cheapest, according to a study.

The machines may be taking over, but investors need to keep an eye on it.

The consumer editor for the Financial Times is ClaerBarrett.

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