Are the additional costs of an actively managed fund worth it?

3 July 2018

As a financial planner responsible for the creation, oversight and maintenance of model portfolios for our clients, I am acutely aware of the continuing debate over actively managed vs passive funds. The discussion revolves around whether the additional cost of active management is worth it overall as passive funds have significantly lower charges – so do you get a better return with an Alpha manager?

So first things first what is Alpha?

Alpha is a measure of the active return on an investment, the performance of that investment compared with a suitable market index. An alpha of 1% means the investment’s return on investment over a selected period of time was 1% better than the market during that same period; a negative alpha means the investment underperformed the market”.

As an advocate of Alpha I was keen to meet Richard Watts, fund manager of Old Mutual UK Mid-Cap, as his track record is second to none. The Welsh wizard has been with Old Mutual for 15 years and lead manager of the fund for the past eight.

Richard heads a well-resourced and experienced team of seven and they are relaxed about Brexit as they believe the market has priced in different outcomes, and consequently stock opportunities.

This was not the case however in June 2016 as after the vote on 24 June, house builders’ and challenger banks’ share prices dropped 50-60%. These have since recovered well, however.

Since June 2016 some Brexit winners include Persimmon, Rentokil, Segro, Berkeley and Bovis homes.

There has also been a significant contribution from the disruption from tech enabled start-ups.

Finding new investment opportunities is always a challenge for a fund like this and with start-up firms tending to remain private for longer, the number of Initial Public Offerings (IPO) available each year has diminished. Experience and reputation in this marketplace means Richard and his team usually still have a good selection to choose from.

So how has the Old Mutual Mid-Cap fund performed against its peer group?1

1 year 3 year 5 year
Old Mut Mid Cap 10.6% 53.0% 135.3%
UK all companies 7.9% 24.0% 60.0%
Quartile Ranking 1 1 1

Producing more than twice the return of the sector over three and five years I believe this is one Alpha manger worth paying for.

Please note: this article represents a personal view from Adrian Bell of Succeed Wealth Management Ltd and is based on current financial news and events around the world. Its content should not be used for investment purposes and you should contact an independent financial adviser before making any investment or financial decision.

If you wish to discuss this blog or your portfolio, please do not hesitate to contact me or your local UHY adviser.

1FE Analytics 25/06/13-25/06/18