If You Want to Beat the Fund Managers, Buy Their Benchmarks

In the world of investing, fund managers often position themselves as the experts who can navigate complex markets and deliver superior returns. 

However, a closer look at some of the largest and most popular funds reveals a startling truth: many of these funds consistently underperform their benchmarks. 

This raises a compelling question for investors—why not just buy the benchmark itself?

A recent analysis of some of the biggest funds in the UK reveals a significant performance gap between these actively managed funds and their respective benchmarks. The table below highlights this underperformance, which begs the question: if the experts can’t beat the market, can you?

The Case for ETFs as Benchmarks

The funds listed above represent some of the biggest names in the industry, managing billions of pounds in assets. Despite this, their three-year returns have significantly lagged behind their benchmarks. 

This raises a crucial point: if these highly skilled, well-resourced managers are struggling to outperform the index, perhaps investors should consider the index itself.

Exchange-Traded Funds (ETFs), which passively track the performance of an index, offer a compelling alternative. Unlike active funds, 

ETFs have lower fees and consistently deliver returns that closely mirror their benchmark. Here are the ETFs that could serve as benchmarks for the funds in the table:

1. St James’s Place Global Quality

Benchmark ETF: iShares MSCI World Quality Factor ETF (QUAL)

Reason: This ETF tracks global stocks with a focus on quality companies, aligning with the fund's investment focus.

2. Fidelity Global Special Situations

Benchmark ETF: iShares MSCI ACWI ETF (ACWI)

Reason: The fund's global focus makes ACWI, which covers global equities, a suitable benchmark.

3. Fidelity Asia

Benchmark ETF: iShares MSCI All Country Asia ex Japan ETF (AAXJ)

Reason: AAXJ tracks large- and mid-cap stocks across Asian markets, excluding Japan, matching the fund's geographic focus.

4. Ninety One Global Environment

Benchmark ETF: iShares Global Clean Energy ETF (ICLN)

Reason: With a focus on sustainability, ICLN, which tracks clean energy companies, is a fitting benchmark.

5. Fidelity Emerging Markets

Benchmark ETF: iShares MSCI Emerging Markets ETF (EEM)

Reason: EEM aligns well with the fund's emerging markets focus.

6. Baillie Gifford Japanese

Benchmark ETF: iShares MSCI Japan ETF (EWJ)

Reason: EWJ tracks a broad spectrum of Japanese equities, making it a relevant benchmark.

7. Liontrust Sustainable Future Global Growth

Benchmark ETF: iShares MSCI ACWI ESG Optimized ETF (ESGD)

Reason: ESGD, which tracks a global equity index optimised for ESG factors, aligns with the fund's sustainable investment focus.

8. St James’s Place Greater European Progress

Benchmark ETF: iShares MSCI Europe ETF (IEUR)

Reason: IEUR tracks European equities, fitting the fund's regional focus.

9. CT Responsible Global Equity

Benchmark ETF: iShares MSCI ACWI ESG Screened ETF (SAWD)

Reason: SAWD, with a global ESG screen, matches the fund's responsible investing mandate.

10. Jupiter Japan Income

Benchmark ETF: WisdomTree Japan Hedged Equity ETF (DXJ)

Reason: DXJ focuses on Japanese equities with currency hedging, aligning with the fund's income-oriented strategy.

Why ETFs May Be the Better Choice

Choosing ETFs over actively managed funds offers several advantages. Firstly, ETFs typically have lower expense ratios, meaning more of your money is working for you rather than being eaten up by fees. Secondly, ETFs provide transparency and liquidity, allowing investors to see exactly what they own and trade at market prices throughout the day.

Moreover, as the data in the table shows, even professional fund managers with vast resources and expertise often fail to outperform the benchmarks. By investing directly in these benchmarks through ETFs, you can potentially achieve better returns without the added cost and risk of active management.

In conclusion, if you’re seeking to beat the market, or at least avoid underperformance, consider buying the benchmarks through ETFs. Not only could this strategy save you money on fees, but it also aligns your investments with the broader market, often leading to more consistent and predictable returns. After all, if the professionals can’t consistently outperform the benchmarks, why should you expect to?

This approach is not only pragmatic but also a clear reflection of the evolving landscape of investment management, where passive investing through ETFs increasingly stands as a formidable alternative to traditional, actively managed funds.

Alpesh Patel OBE

Visit www.alpeshpatel.com/shares for more and see www.alpeshpatel.com/links

Disclaimer: The content provided on this blog is for informational purposes only and does not constitute financial advice. The opinions expressed here are the author's own and do not reflect the views of any associated companies. Investing in financial markets involves risk, including the potential loss of your invested capital. Past performance is not indicative of future results. 

You should not invest money that you cannot afford to lose. Mentions of specific securities, investment strategies, or financial products do not constitute an endorsement or recommendation. The author may hold positions in the securities discussed, but these should not be viewed as personalised investment advice.  

Readers are encouraged to conduct their own research and seek professional advice before acting on any information provided in this blog. The author is not responsible for any investment decisions made based on the content of this blog.