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Publication date : 01/09/2017

Author : Birdee

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Active Funds versus Liabilities: the Birdee choice

For many years the financial services industry – particularly in Europe – has actively promoted active investment funds. These are widely purported to offer the most attractive returns and investors are encouraged to select them. But in reality, they are not a great choice.

Firstly, active funds typically come with an annual management fee of around 2%. They are managed by managers who specifically choose companies that reflect their beliefs. But who’s to say their beliefs are any better than the rest of the market?

A recent SPIVA study by S & P Down Jones, shows that over 85% of active funds invested in European equities actually do worse than the index that replicates each of them over 5 years. The average performance of these funds is 1.5% lower than their overall index (S & P Eurozone BMI).

It’s the same for active funds invested in US equities: 99% of funds do worse than their index over 5 years and these funds have an average performance of 5% lower than their index (S & P500).

In fact numerous studies show that 80% of a portfolio’s performance is determined by the way it’s put together. Securities only account for 20% of performance. In other words, it is how you allocate assets that has the biggest influence on returns.

So what are the alternatives?

Well, if the majority of active funds perform worse than their index, it’s advisable to buy the index instead –
ETFs are funds which replicate their index and offer the performance of the index. In addition, ETF management fees are much lower than those for active funds at around 0.30% per year. They are also more liquid as they trade on the stock exchange; this offers a great deal of flexibility and ensures the availability of invested capital at all times – a huge benefit to most customers.

What conclusions can we draw?

ETF portfolios combined with a rigorous allocation methodology is the best approach. This is exactly what Birdee offers a proven methodology for determining asset allocation and a selection of cheap and liquid ETFs.

Test our portfolios here to see how our passive funds perform.

Geoffroy Linard