We spend a lot of our time researching the market, and searching out investment ideas. The argument we hear a lot is whether investors should choose passive or active funds. This led us to test our portfolios against passive funds. The argument being that if we couldn’t significantly outperform a portfolio of passive funds then why not use them. The portfolios were launched in 2009, and only in 2011 did we underperform the passive funds. Since launch we have added nearly 100% extra performance compared to passives.
When we look at performance of funds we now compare against the benchmark. We accept over a short period the fund may underperform but it is long term trends we are looking at.
I recently listened to the fund manager of the Rathbone Income Fund; we did all the due diligence on the fund and it came up on our potential buy list. The Rathbone Income Fund uses the FTSE All Share Index as their benchmark but for an Income Fund we feel the iShares UK Dividend ETF is a better benchmark.
This showed since 2009 only in two years did it significantly outperform the passive fund and in other years it either matched the performance or significantly underperformed. Over five years it did outperform the tracker by about 10%.
Neil Woodford is held up as the guru of income investing and so we ran the figures since 2009. In three years he significantly underperformed the passive fund, two years he significantly outperformed and the rest remained flat. Over five years the tracker significantly outperformed.
There are income funds that have consistently and significantly outperformed the passive option but the danger is that often investors go towards the funds they are guided to without considering the options.
If we unpick the option further the ETF pays 4.5% yield compared to 3.5% for the other funds. The ETF picks the top 50 dividend yield stocks in the UK so there will be a significant crossover in holdings. Where the likes of Neil Woodford have added value are at times of negative sentiment – 2007, 2008 and 2011 were the periods where he was able to demonstrate the power of active management.
In summary there is no right or wrong route to investing. However, investors need to take care in identifying what they are looking for and understanding the investments they are using to achieve that. Sometimes the hidden gems are not always those that are on the surface!