Wednesday 02 December 2015 11:17 am

Hargreaves Lansdown’s Wealth 150: Why exceptional fund managers remain the exception

Hang onto your hat – 97 per cent of active fund managers aren’t worth their salt.

Perhaps surprising coming from someone who makes a living researching actively managed funds, but before you rush for the door, let’s delve a little deeper.

This week marks the 12th anniversary of Hargreaves Lansdown’s Wealth 150, which lists the funds we believe will deliver superior long term results against their peers.

So how have we done? Well, of the 10 sectors continually represented on the list since it was first launched, Wealth 150 funds have outperformed in nine. This illustrates it is possible to find managers capable of providing superior returns year in, year out.

However, despite the thousands of funds available, the list has shrunk over time as we have found exceptional managers to be the exception rather than the rule.

It doesn’t help the industry is overly fixated on three-year performance. Strong results over this period could be as much down to blind luck as skill, in my view.

Over a longer period, chance plays less of a factor. Toss a coin 10 times and there is less than one per cent chance of getting ‘heads’ every time – toss it three times and the odds are much higher.

Analysing a fund manager’s track record over 7-10 years allows a deeper understanding of what drives returns, and offers a greater chance of observing performance through both boom and bust years.

Once an exceptional manager has been identified, who adds significant value while the sun is shining, and offers shelter when the rains come, the key is to follow them – follow the manager, not the fund.

Historically, picking quality managers has been the primary, if not only, concern to most investors. However, the fees and charges levied can have a significant effect on final returns.

First-class performance, alongside low management charges, is the ultimate combination.

We introduced the Wealth 150+ last year in an effort to drive down investment management fees and our clients receive a 20 per cent discount on the average annual charge on our favoured funds as a result.

My prediction is high-quality actively managed funds will attract the lion’s share of investors moving forwards, leaving expensive and poorly managed funds by the wayside.

Competition at the top should help drive fees lower as managers realise they need to compete on both performance and cost, which can only be good news for investors.