Long-term statistics show that more active funds fail than succeed at beating the wider market. That’s why some investors prefer to opt for the simpler approach of “buying the market” passively through an index fund or exchange-traded fund (ETF).
Lower costs are a key attraction, with some passive funds offering exposure to US and UK markets charging less than 0.1% (£10 on a £10,000 investment) a year versus typically around 0.9% (£90 on a £10,000 investment) for an active fund.
Simplicity is another attraction. With passive funds, investors know what they are going to get – broadly the return of the index. With active funds, in contrast, investors hope the manager outperforms the index, but there are no guarantees. And if the fund manager doesn’t bring home the bacon, investors are still charged the percentage fee.
However, proponents of active management argue that they are not looking for the average fund or the average return, and that identifying the cream of the crop among fund managers can result in notable outperformance over a stock market index.
While there’s plenty of debate over the merits and flaws of active and passive funds, one area of common ground is that certain fund approaches really struggle to gain an edge over an index, such as US active funds. However, other areas have been happier hunting grounds for active funds, such as UK smaller companies.
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Even Warren Buffett, one of the world's greatest investors, has had his say on the active versus passive debate. He has instructed the executors of his will to buy an index tracker for his wife after he dies, specifying a 90% allocation to Vanguard’s S&P 500 index fund.
However, in defence of active management there are some great fund managers that have earnt their stripes by delivering eye-catching market-beating performance over their careers. With this in mind, we crunched the career track records of six names that are considered some of the UK’s true star fund managers.
The visualisation, with the data sourced from Morningstar, charts the career track records of Harry Nimmo, Giles Hargreave, Richard Buxton, James Anderson, Nick Train and Terry Smith. Each column begins when they started managing their respective fund or investment trust.
Nimmo has the longest track record (from January 1997), which is where our visualisation starts. The other five names join on their own start dates. Each fund manager begins with a hypothetical £10,000 invested in their funds. Over time, the infographic shows how much their stock picking abilities had increased that initial investment until either the fund manager retired, or to the end of October 2023 for Train and Smith who are still very much plying their trade.
For a comparison, we included the total return of £10,000 for the FTSE 100 index from the start of 1997. As is evident at the end of the visualisation, all the fund managers delivered higher returns – even Train and Smith who only launched their funds much later (July 2006 and November 2010 respectively). When examining annualised returns, all six comfortably beat the 5.79% annual total return from the FTSE 100.
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Leading the way is Giles Hargreave, who managed IFSL Marlborough Special Situations, with an annualised return of 17.49% over 22.4 years. Hargreave made his name as a smaller company specialist, with an astute eye for finding “tomorrow’s winners”.
Next is Terry Smith, of Fundsmith Equity, who over 13.1 years has delivered annualised gains of 14.90%. Smith aims to buy and hold, ideally forever, high-quality businesses that will continually compound in value. He runs a concentrated portfolio of less than 30 shares.
Third in the rankings is James Anderson, who steered Scottish Mortgage (LSE:SMT) to 14.32% annualised returns over his 19.6-year tenure. Anderson built the investment trust’s portfolio around the underestimated power of structural, technological change, seeking to identify companies with disruptive technologies that would be able to change the business models of the traditional corporate giants. Scottish Mortgage has been an early investor in several companies that have become household names including Amazon (NASDAQ:AMZN) and Tesla Inc (NASDAQ:TSLA).
Fourth is Harry Nimmo, who was the longstanding manager of a UK smaller companies fund, mainly at Standard Life, prior to the firm being acquired by abrdn and the fund renamed abrdn UK Smaller Companies. Over 26.9 years, his annual returns were 11.96%. Nimmo favoured high-quality growth companies with positive momentum, such as companies showing signs of improving their position in their respective industry.
Next is Nick Train, who over 17.4 years has annualised returns of 9.63% for WS Lindsell Train UK Equity fund. Train runs a concentrated portfolio of high-quality growth companies. In particular, he favours companies that have loyal customers, due to having market-leading brands or a product or service that is superior to the competition.
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In sixth is Richard Buxton, with an 8.56% annualised return over 21.4 years. We’ve used two funds for his track record as he switched fund firms but carried on running the exact same strategy. Buxton is known for running concentrated portfolios of UK shares and implementing a buy-and-hold strategy.
Of course, holes can be picked. The chances are not many investors would have backed these star investors on day one before they made their names. In addition, while these six managers have shown a consistent level of long-term outperformance, they are in the minority.
In fact, if the fund closures and fund mergers were incorporated into the active versus passive performance debate it would favour the latter even more.
However, while on average most fund managers underperform, and even the cream of the crop are not immune to a change in fortunes, some really do add value.
These articles are provided for information purposes only. Occasionally, an opinion about whether to buy or sell a specific investment may be provided by third parties. The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.
Full performance can be found on the company or index summary page on the interactive investor website. Simply click on the company's or index name highlighted in the article.