Personal Account: Is it worth paying for professionals?

Worse still, at about 1.5%, the fees for actively managed funds are more than twice as high as the typical costs of passive unit trusts and exchange-traded funds.

Nobody seemed to care much about annual management charges during the great bull run of the 1990s, when many equity investors enjoyed double-digit gains. Yet now the annual costs of actively managed funds often absorb nearly a quarter of average gross returns — which have sunk to 7% over the long term, and rather less recently.

Rising investor cynicism and falling fees have sparked an existential struggle high up in the plate-glass palaces of the Square Mile. For example, I was sad to see Daniel Godfrey, chief executive of the Investment Association, defenestrated after he urged fund managers to be more open about costs and to put their clients first. He is a good man who did not deserve to be ousted from his post.

Rather than getting bogged down in the rights and wrongs of a trade dispute, I asked some financial advisers and intermediaries to scrutinise returns since the turn of the century to see if active fund management beat passive index-tracking. The firms I approached sell both types of fund, so they should be unbiased.

Perhaps surprisingly, their calculations show that £10,000 invested in the average UK equity income unit trust would have grown to £24,500 since the turn of the century, compared with just £16,300 in the average UK tracker fund. Both figures include charges and reinvested income (dividends).

Darius McDermott, managing director of Chelsea Financial Services, told me: “The average actively managed UK equity income fund outperformed because it did not need to hold shares in oil and gas companies, basic resources and banks — all of which have done badly over this period. Tracker funds are full of yesterday’s stories — or companies that have done well in the past — but active fund managers aim to invest in those that will be successful in future.

“One of Chelsea’s main functions is to try to find the best funds for our clients. For example, we have analysed our core selection list over the past 14 years since its inception and our choices have outperformed the Investment Association’s flexible sector — funds that hold a mixture of assets — by 62% after fees.”

Gavin Haynes, managing director of Whitechurch Securities, said: “Active funds have outperformed because they have been able to avoid problems faced by very large companies whose shares dominate the indices and thus the trackers. Meanwhile, many medium and smaller companies have seen a sustained period of outperformance, and tracker funds tend to be underweight in these areas compared with active managers who trawl the whole of the market.”

That rings true with me. I invest about 80% of my “forever fund” directly in shares to keep costs down and yields up — sometimes with horrible shocks, such as Volkswagen, discussed here last month. But the rest of the money is in funds, particularly smaller companies funds with managers who seem likely to add value. They can scrutinise corporate acorns many of us have never heard of before they become the oaks of tomorrow.

The difficulty remains how to sift the survivors from the doomed. Mark Dampier, research director at Hargreaves Lansdown, freely admitted: “There are very few good active managers — more than 90% are not worth looking at. Nor can you tell a good manager on day one, but, given time, you can start to make better- informed decisions.

“One very important point to understand is that returns from trackers do not necessarily match returns from the stock market index they follow because these funds have management costs. Buying a tracker gives you guaranteed underperformance for that reason.”

Alan Steel, who will celebrate 40 years as an independent financial adviser next week, pointed out a fundamental problem with passive funds: “The best way to create investment profits is to buy low and sell high, but tracker funds do the exact opposite. They are overexposed to shares trading above their fair value and underexposed to shares trading below their fair value. The more a share rises, the more tracker funds have to buy, and vice versa.”

So, as in many walks of life, the cheapest option is not necessarily the best value. Cost should not be our only criterion in matters of importance — as I hope readers of this newspaper will agree. That’s why, despite soaring sales of trackers, I continue to believe it can pay to stump up for professional fund management and shrewd stock selection.

Top-up highlights folly of state Ponzi scheme

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More than a quarter of a century ago, I opted out of what was then called the state earnings-related pension scheme in favour of paying some of my national insurance contributions (NICs) into a personal pension instead.

Put simply, I preferred to have a pot of private property with my name on it into which my NICs were paid, rather than an ill-defined share of an unfunded government scheme. Back then, relatively few people could believe that governments of every party would run something similar to a Ponzi scheme, with NICs deducted from last week’s pay packets used to pay next week’s pensions.

Or, as Nye Bevan, above, one of the founders of the welfare state, used to say: “The great secret about the national insurance fund is that there ain’t no fund.”

Such a hand-to-mouth arrangement would be illegal in the private sector because it is vulnerable to risks such as rising numbers of claimants and fewer people paying in.

If that combination of circumstances seemed somewhat hypothetical in the 1980s, it does not seem so now.

Indeed, it explains why savers who are more trusting than I are being told they must wait longer to retire and benefit from the state scheme. These thoughts came to mind last week when I read my colleague Ruth Emery’s comprehensive analysis of the government’s invitation to people who are in or near retirement to top up their state pension entitlements.

The main worry remains one that actuaries cannot assess: the risk that the government will move the goalposts again. I still believe — as I did in 1989 — that it is best to regard the state pension as nothing more than a safety net to guard against destitution in old age. Anyone aiming higher should save for themselves and not put their faith in politicians.

ian.cowie@sunday-times.co.uk or @iancowie on Twitter