Examining the monthly returns of 516 UK open-ended equity funds between 1998 and 2008, the study revealed an average annual post-fee alpha return of negative 1.44 per cent. Pensions Institute director Blake says: “This suggests that a typical investor would be almost 1.44 per cent a year better off by switching to a low-cost passive UK equity tracker.” The “star manager” culture helped active management retain its lustre, Blake says, however just 1 per cent of managers are able to return more than trading and operating costs. “But – and here is one of our key findings – they extract the full rent from their skills in the fees that they charge,” the report says.
In a second paper, the Cass Business School authors argue funds should split once they hit “a critical size” to protect investor returns. Using the same data as the first study, they discovered annual alpha generation dropped 9 basis points for every 1 per cent increase in assets under management.
Large funds under perform smaller ones because the growing footprint in the same stocks pushes up prices and lowers yields, the report concludes. Blake said the findings suggest funds should consider splitting when they reach a critical size. Worth bearing in mind.
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