If your portfolio has lagged the market this year, youre not alone. This yearhas been the worst year for active stock pickers, in terms of performance for more than 30 years.
Estimates vary, depending on which fund dataplatform you use, but roughly 80% of active fund managers underperformed their benchmarks this year. Just to put that into some perspective, over the past ten years once again depending on which source you use roughly 45% of fund managers have beat their benchmarks on average.
So, this year only 20% of mangers have outperformed, compared to the long-term average of around 45%.Thats a big difference.
But why has this year been so difficult for fund managers? Well, the market has been choppy, there have been plenty of price swings that few predicted.For example, in the mining industry the prices of key commodities has plummeted and the same can be said for oil. Further, emerging markets have been volatile, the debt markets have been unpredictable and several mega-mergers have fallen through due to the US governments crackdown on tax inversions.
All in all, 2014 has been an extremely unpredictable and volatile year forfinancial markets all over the world.
What can you do about it?
There are several things you can do to try and jump start your performance. Firstly, wait; as noted above this year has been especially bad for many investors and theres no reason to believe that this will continue.
Take for example, the small-cap market. Both here in the UK and across the pond in the US, 2014 was an especially bad year but 2013 was a record year. So, while theFTSESmallCaphas fallen 5% year to date, over the past two years the index has risen 24%. (The USs Russell 2000 small-cap index is up 37% over the past two years.)
Secondly, you could sell everything and buy an index fund. Unfortunately, if youre looking to outperform then a tracker is not the way to go. As their name suggests, trackers are designed to track, not outperform. Whats more, after including a management fee, trackers will almost certainly underperform the index they are tracking every year without fail.
The third option is to get smart. Specifically, one of the fund classes that has racked up the best performance over the past few years is smart beta.
Simply put, these are low-cost passive funds thatare not weighted by market capitalisation. Instead, the funds holdings are weighted by other factors, such assales, cash flow and dividends.
On average, these smart funds outperform their benchmarks by 2% per year. One of the worlds first smart beta funds,the Guggenheim S&P 500 Equal Weight fund, has returned 11.3% per annum since 2003. In comparison, over the past 10 years, the S&P 500 has returned around 9.2% per annum, excluding dividends.
A fourth option
The fourth and final option is to build yourself a portfolio of trusty divided stocks and reinvest your dividends. For example, over the past ten yearsUnileverhas produced a total return of 12.9% per annum, more than double the return achieved from a standard tracker fund including fees. Furthermore,National Gridhas achieved an average ten-year annual total return of 11.5%, once again nearly double the return of a FTSE 100 tracker over the same period.
Now, you may be thinking that I’ve just cherry picked UnileverandNational Grid as examples because their returns are better than average, but that’s not the case. Indeed. Unilever has actually been picked by the Motley Fool’s top analystsas one of the top five shares you should hold in your investment portfolio, due to the company’s defensive nature and hefty dividend payout.
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