How active funds can protect your savings in turbulent times (2024)

The havoc in the stock markets caused by the oil price war, coronavirus and the US travel ban has left one group of private investors particularly out-of-pocket and angry.

These are investors in index-trackers which have been hard hit in the nerve-jangling rollercoaster of the past week.

As we stand on the brink of a global bear market, concern is mounting that too little attention has been paid to the flaws of these funds, which are of the 'passive' type.

It means to mimic the performance of a stock market or index, unlike 'active' funds that rely on a manager selecting shares and other assets that they hope will perform well.

These defects may have been overlooked in the rush to embrace index trackers. The tracker craze intensified following the Woodford scandal. The conduct of Neil Woodford, once the most celebrated active manager in the UK, has reduced confidence in the active approach.

Low charges are another reason for the popularity of index-trackers, which depend on artificial, rather than human intelligence, which comes at a high price.

But while index trackers may be the cheapest way to invest, they do have big drawbacks which have recently been laid bare.

They may flourish in fair stock market weather, but can be extra susceptible when the dark clouds gather. Since the start of this year, the FTSE 100 index has tumbled by about 30 per cent. That has hit tracker fund investors very hard.

BP and Shell, which have suffered badly, are two of the index's constituents.

Popular Footsie trackers such as the Vanguard FTSE 100 Index fund have subsided in line.

Between February 21, when the sell-off started in earnest, and the close on Thursday, the fund was down as much as 28.4 per cent.

Vanguard, a US group, has about $10billion of savings in its care. Like other players it has benefited from discontent with those active managers who collect fat fees, but fail to deliver decent returns.

Active funds have, of course, also been caught up in the maelstrom. But Jason Hollands of Tilney Bestinvest, the investment platform, points out that the managers of these funds have the scope to build a buffer of defensive stocks or cash, a feature that has helped limit the damage. Index tracker managers do not have this facility.

Experts emphasise that there is no need to panic, but also to see recent events as a wake-up call.

Laura Suter, personal finance analyst at AJ Bell, the investment platform, underlines the risks inherent in tracker funds' structure: 'The downside is that you are buying the whole of the market and so are exposed to the full extent of any falls.'

Hollands highlights another pitfall – some index-tracker investors may hold a disproportionate amount of larger shares.

The inconvenient truth about index trackers will continue to be debated while panic grips the markets.

In the meantime, disaffected tracker investors will be looking for active funds that, while not immune from the market downturn, will still strive to provide a degree of capital preservation.

Suter's safety-first choice is the Personal Assets Investment trust from the Troy Asset Management. This holds big name shares, plus cash, gold and government bonds.

Ben Yearsley of Shore Financial Planning favours Troy's Trojan fund, which invests in government and corporate bonds, precious metals and cash.

Hollands selects Liontrust Special Situations that proved its resilience in 2008 at the time of the financial crisis. This buys shares in companies that are non-cyclical (less subject to the ups and downs of the economy) and have strong revenue streams.

The Scottish Mortgage Investment Trust from Baillie Gifford would suit those confident in Amazon and other tech giants.

Some investors seeking security may still baulk at active management fees. One answer to this is 'smart beta', a type of exchange traded fund (ETF) that aims to offer some of the strengths of the active approach by tracking elements of a market rather than every stock in the index.

Dzmitry Lipski, head of funds research at investment platform Interactive Investor, cites the SPDR S&P Global Dividend Aristocrats ETF which tracks the S&P Global Dividend Aristocrats Quality Income Index of the highest-yielding dividend stocks.

Anyone who needs an income may be tempted, if only by the delightfully convoluted name, while hoping that competition from this source will increase the pressure on more active managers to lower their charges.