How do we pick the investments we recommend? Well, ‘performance’, or how much money they make, is of course important. And how do we, and they the fund managers in promoting their wares, measure that? Usually by comparing what they’ve made or lost against a ‘benchmark’, and there’s the rub. I always look at how they’ve done in comparison with other, similar (in terms of risk and where they’re invested) funds and portfolios. In recent years, many have come up with other, arguably easier to beat measures. One of those has been ‘volatility’, how much they go up and down (so they can say going up isn’t as important). Another has been inflation with ‘aiming to provide returns of the CPI + 3%’ being a common one. Which suddenly means 10-12% a year, rather than 5-6%. Hoist by their own petard, is, I think, the expression.
“LSEG report: Most active funds are underperforming their benchmarks”
So-called ‘tracker’ or ‘passive’ funds have become very much more sophisticated in recent years, largely facilitated by technology. The originals, you may remember the Virgin UK Index Tracker, launched nearly 30 years ago, mimicked the FTSE index and, as they don’t need anyone to manage them, were and are very much cheaper than ‘active’ funds.
