Investor Views: "Why I’m Sticking with Passive Funds"

Former City worker Dominic Ashbury says keeping a tight control on costs is the key to decent investment returns

Emma Simon 26 January, 2017 | 2:15PM
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Dominic Ashbury has been investing since the mid-1980s. But his portfolio strategy has changed considerably over this period.

“I started off buying individual stocks, such as oil minnows, or privatisation shares. I was looking to make a quick return on my money,” he said.

At the time, he was working in the City of London, and was involved in the hedge fund sector. “I think this approach was endemic at the time. We were looking to beat the market. Sometimes it worked, sometimes it didn’t.”

Of the privatisation shares he bought, such as British Gas, many did not make a decent return in the long term.

“Their advertisements inviting the public to invest should have said ‘Tell Sid what a poor investment this turned out to be’,” he says. The company was subsequently split into Centrica (CNA) and the BG Group, which was bought by Royal Dutch Shell (RDSB) in 2016.

Since those heady days of 1980s stock investments, Ashbury now looks at building longer-term returns.

“Trying to pick individual stocks that will beat that market rarely works,” he admits. “Most people can’t get sufficient diversification. And there are significant costs if you trade frequently.”

Now Ashbury prefers to invest in funds: “I am looking to make long-term investments, and invest in funds where there is a tight rein on costs.”

One advantage of taking this more long-term approach was that he avoided the biggest fallouts from the dotcom crash. He says: “I use both SIPPs and ISAs to invest in funds, and I also manage a couple of accounts for my family. It’s important to make the most of these tax wrappers, as this can help boost returns. This is particularly important in a low return environment, which we’ve had for quite some time now.

“Last year was more buoyant, but for the decade prior to this returns have been pretty slim. This is why I’m keen to keep costs to a minimum.”

Using Low Cost Funds to Boost Returns

Too many managers charge high fees for average returns, he says, which means over the long term investors lose out. He adds: “Many large investment houses are resting on their laurels with the amount of money that is sitting in these under-performing funds. It seems to be a particular problem in the retail market. Institutional investors are rarely paying such a high price for below-average returns.”

To this end much of his SIPP and ISA holdings are in passive funds. He has tracker funds with a number of providers, including the BlackRock UK Equity fund, and the HSBC American Index Fund.

The BlackRock UK Equity Tracker Fund has a four-star performance rating from Morningstar and a Silver Analyst Rating. The fund aims to fully replicate the FTSE All-Share.

Hortense Bioy, an analyst at Morningstar says: “This fund is a worthwhile investment proposition for those looking to gain broad exposure to the UK equity market.” It’s fees are just 0.06%. As Morningstar points out this give it a competitive edge against many active managed funds that are in the large-cap UK sector. It points out that this fund has been delivered above average return in eight out of the last 10 calendar years.

Bioy adds: “This BlackRock tracker has the potential to deliver consistent consistent superior returns over a full market cycle.”

Morningstar also highly rates the HSBC American Index fund. This fund, which tracks the S&P 500, has a four star performance rating, reflecting its strong performance in recent years. It also has a coveted gold-medal rating reflecting Morningstar’s confidence that it will continue to outperform peers in its sector.

Morningstar says: “It is difficult for active managers to outperform US large-cap benchmarks, so taking a passive investment approach to this asset class makes a lot of sense.”

It pointed out that charges on this fund – at 0.08% – were competitive not only against other active but also its passive rivals, including exchange-traded funds.

Morningstar adds: “This HSBC index fund has done a good job tracking its benchmark in recent years. Introducing the use of futures for liquidity management purposes in 2009 dramatically improved the fund’s tracking performance.”

Ashbury says many people who used to work in the financial sector, like himself, stick with tracker funds. “They know most people in the City can’t consistently beat the market.”

Active Funds Which Earn their Fee

But this does not mean he shuns actively-managed funds completely. “I’m looking for funds where the manager has a good track record matched with a sensible approach to costs,” he said. This includes an investment in Fundsmith Equity, managed by Terry Smith. This global equity fund has a five-star rating, reflecting its outstanding performance in recent years – it was launched in 2010. It also has a Bronze Rating reflecting Morningstar’s confidence that it will continue to outperform.

Morningstar says: “In many ways the fund is as characterised by what it won’t own as by what it will. Smith looks to invest in compoundable earners, which ideally he could own forever. Ultimately he aims to invest in companies that are already winners and does not seek to identify tomorrow’s winners.”

This approach “buy and hold” approach helps keeps costs to a minimum.

Ashbury also invests in Woodford Patient Capital Investment Trust (WPCT), run by Neil Woodford. He says: “This seems to hold a diverse range of interesting investments. I like the idea that it is also very focused on longer term horizons.”

He says he likes the way that he can access private equity through this trust. “This seems a lot more flexible than investing in VCTs, for example,” he says.

This trust – which launched in 2015 – has yet to build up a long-term track record. But over the last year it has underperformed its benchmark. Ashbury says he is not too concerned about this “Too many people chase short-term performance which can be detrimental to their interests in the longer term. If you’ve got a pot of money to gamble with then by all means take a punt on individual shares, but it’s a bit different when it’s your retirement savings. I’m now more interested in the long-term average returns.”

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About Author

Emma Simon

Emma Simon  is a financial journalist, specialising in investment and consumer issues, writing for Morningstar.co.uk