informed decisions blog

Managed Funds fail to beat the market, most of the time! Blog 153

1st September 2020

Paddy Delaney

Managed Funds Ireland

Actively Managed Funds under-perform Passive Index Funds in the majority of cases. Managed funds usually exist in order to beat the market. They generally don’t succeed. This is not an opinion or a prediction, it is a fact which you will see full evidence of in a moment.

I will start however by reminding you of another fact. Your behaviour as an investor will have potentially far more of an impact on your investment success than whether you are invested in actively managed funds or passive. By ‘behaviour’ I mean whether you stick to the strategy or not when your portfolio is either screeching upward or downward at a future date. With that irrefutable truth out of the way, lets look at the facts.

When it comes to investing and choosing the best available solution, whether managed funds or passive or whatever, we like facts. We try to ensure you, dear reader, have access to facts. We abhor opaqueness and smoke-n-mirrors when it comes to you investing your future wealth. Whether it is a kids savings account, a windfall, a retirement pot, your life savings or a retirement income vehicle. Facts are the only things any of us should focus on.

Investing Routes – A Long Way To Tipperary!?

Active versus Passive investing is kinda comparable to travel. Let me explain. If you wanted to travel from Dublin to Tipperary, and had to choose from two different options of transportation. Both options are reasonably expected to get you there!

However, you are informed that, based on the past 50 years of transport data for the two options, transport Option 1 has completed this journey more quickly and more safely than Option 2 in the vast majority of cases. In summary, Option 1 performs better than Option 2 in the vast majority of occasions.

Bearing in mind you probably want to get their on time and safely, which option do you decide to take? Assumption is a dangerous thing – but I’m going to assume most of us pick Option 1 here – it’s possibly less exciting and less mysterious than Option 2, however it does what we want it to do more reliably. It’s a long way to Tipperary indeed!

Active Managed Funds Versus Passive Funds?

Active versus Passive is an age-old debate, and has been rich content for promoters of both to work with. Over the years I have seen and read Active Fund Managers talk about ways to maximise your investing results by using their services. Likewise I’ve read Passive Fund Managers talk about ways to use their vehicles for best results.

We can talk about inflows versus outflows and synthetic versus physical and core versus satellite – however what we really all care about are the whether something is safe (will we reach our destination, or crash and burn!) and whether it will deliver the returns we need (how quickly will we get to the desired destination).


We are not talking about conventional risk or volatility here – we are talking about total loss of capital. Safety here refers to whether your money fully disappearing – not just temporarily declines in value. Any well diversified portfolio, whether it is a managed fund approach or a passive approach should never expose you to this danger. Permanent loss of such magnitude has never to our knowledge occurred based on the investment being either a managed or in passive nature. Never.

If you are investing or are already invested, it goes without saying that we encourage pursuing only regulated investments which are advised by regulated and authorised advisors. These funds will be invested and protected in line with Irish and European regulations. Pick an un-regulated investment, advisor or Private Equity offering and you are voluntarily multiplying the probability of you suffering actual permanent and irreversible loss of capital. Why take that risk?


This is where the tangible factual differences begin to appear.

S&P Global are one of the main players of tracking and monitoring market indices. Worth a look at their website and the content available there might help develop your knowledge if interested.

A client we work with actually sent us a report from S&P Global recently, what they call the ‘S&P Indices Versus Active’ (SPIVA) section of their services. It is that report that tells us the facts about managed funds versus passive index funds – here is a summary.

As of December 2019 – over the past 5 years the market returns in each of the following regions out-performed managed funds (who exist to try and beat the market) in the following percentage of cases:

Europe: 77%

US: 80%

Canada: 96%

South Africa: 61%

India: 82%

Japan: 69%

See latest SPIVA reports from S&P Global here.

To put it another way – actively managed funds have, on average, beaten the market that they exist to beat in less than 23% of cases. That is a fail, no matter what way you look at it.

We have not been able to determine if these stats allow for the significantly higher fees that typically go with investing in managed funds versus passive index funds. If this is not already factored, you can assume that the tables will turn even further in favour of the passive approach.

We have seen umpteen similar studies over the years – this is probably the most up to date and credible analysis I have seen in a while.

Our Experience

For what it’s worth, in our advice firm we regularly are contacted by individuals who are already invested in managed funds – most of them with significant pension or investment assets invested in such funds for significant periods of time, so we have a long performance record to analyse. When they engage us to analyse their strategy we analyse and compare the managed funds in risk-return terms. For what it’s worth, we have yet to see a single case where managed funds have delivered anything like what a comparable risk-rated index portfolio approach has delivered. And that is before you take account of the 2-3% annual fee that investors in such schemes usually pay.

Gains & Losses

It is worth noting at this point, if investing outside of a pension structure, the tax treatment of a managed fund or passive fund may differ and therefore needs to be considered. If an investor has significant capital losses that they wish to try to write-off against future capital gains – an active managed fund can be a good route to take. In vast majority of other cases however, due to performance returns alone (not to mention fee differential) unless one had a capital loss to utilise, a CGT-able managed fund stood a very poor chance of having been the better option, as you will have seen in the SPIVA stats.

If an investor wants to achieve the returns of the market they can do so pretty effectively by investing in an index fund. Not all index funds are equal of course, so aim for one that is proven to track very closely the markets that you wish to invest in, and that it is cost-effective. Once you have done that, take note of Warren Buffett’s nuggets from last week – simple as that, right!?

Managed Funds or Active Funds?

While this is all (hopefully) very interesting – what must not be forgotten here is that people every day of the week are handing their life savings to ‘helpers’ who claim that they will beat the market. Investors are swayed by the brochures that show teams of economists, researchers, managers, executives and quantitative analysts staring thoughtfully into busy computer screens, trying unsuccessfully it turns out to pick stocks for their investors. An investor might think that because they are ‘going to beat the market’ that it’s OK to pay them 3% of their fund per year in fees!?

However, on average managed funds have failed to deliver on the promise. Failed to do what they said they would do. In the majority of cases, they have failed to beat the market – and have charged you a premium for it.

I’ve been told by more than one active fund manager that their own money is in passive funds – which sums this all up pretty clearly don’t you think.

If the day comes when there is sufficient statistical data showing that this trend has changed; that the majority of actively managed funds beat the markets, I’ll be the first one to let you know. Until then, I know which option I’m pursuing!

Paddy Delaney QFA RPA APA

P.S The value of your investments will rise and fall, and you could get back less than you invest. Based on the above stats, it seems that the chances of getting back less than you invest are actually higher if you invest in a Managed Fund! This Blog is not advice, but hopefully it is common-sense! Disclaimer

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