Episode 397 - In this week's episode I discuss how active and passive funds have fared in 2022 & why conventional wisdoms have been turned on their heads. I also reveal an issue that many passive investors may be unaware of. I then discuss the mortgage market and the outlook heading into 2023, as fixed rate mortgage deals start to improve. Finally, Andy explains the loan fee scam that the FCA is warning consumers about.
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Transcript highlights - Episode 397
Passive investing flaws
We've previously conducted research as part of our 80-20 Investor service on whether active or passive fund performed best in sideways or falling markets, but the results were inconclusive. However, the research suggested that active fund managers tended to outperform passive funds during a rising market following a sideways trending market. An explanation for this may be that in a sideways market, active fund managers take on extra risk to boost performance, which in turn benefits them if markets suddenly rally. However, the performance of active funds varies considerably based on the asset class they invest in. North American equity active funds still tend to underperform passive benchmarks, like the S&P 500. But in Europe and the UK, active funds often outperform their passive peers. You can find out more by reading the 80-20 Investor research piece "Do active funds really outperform passives in sideways or falling markets?"
2022 was a difficult year for investors due to falling bond and equity markets, partly caused by the Ukraine war, rising inflation and central bank interest rate hikes. A newly released piece of 80-20 Investor research, discussed on this podcast episode, provided insights into how active and passive funds performed in extreme market moves, such as we experienced during the pandemic and 2022. We analysed the performance of passive and active funds in various asset classes (including emerging market equities, European equities, global equities, Japanese equities, North American equities, UK equities, Sterling corporate bonds, UK gilts, and UK index-linked gilts) to determine whether active or passive funds performed best.
Interestingly in 2022 active funds marginally outperformed passive strategies in North American equities - bucking the historical trend. The marginal difference in performance between passive and active funds in North American equities may be because active managers were able to reduce interest rate risk throughout 2022 (by holding less technology stocks), unlike passive strategies which tend to track cap-weighted indices. When looking at UK & global equity and bond sectors, passive strategies that invested in UK equities were the only funds (whether active or passive) on average to produce a positive return in 2022 - again bucking the historical trend for active funds to outperform in the UK. Passive UK equity funds benefited from their overweight to oil and gas companies, something which widely tracked indices such as the FTSE 100 benefited from. Last year, passive funds also also on average tended to outperform their active counterparts in bond sectors, especially index-linked gilt funds. Index-linked gilt funds were heavily affected by interest rate moves and passive strategies were more affected than active funds due to their sensitivity (called duration) to interest rate moves as a result of following strict indices, rather than being able to manage their interest rate risk as active managers can.
Mortgage market outlook
Read our regular update on where mortgage rates will be in the future. Also compare the best fixed-rate mortgages and variable rate mortgages currently available.
Loan fee fraud
Loan fee fraud is a scam where a fake loan provider will ask for an upfront fee to guarantee a loan or credit, but ultimately the consumer never receives the loan or credit. Warning signs include:
- being pressured to make an upfront payment into a bank account
- or transferring money via an unusual method
- being asked for additional payments after the first payment
- the firm is not listed on the Financial Services Register.
To protect yourself from loan fee fraud:
- always check the Financial Services Register to see if the firm is regulated
- use the contact details on the register instead of a direct line or email given to you
- Ii the firm is not listed, call the consumer helpline at 0800 111 6768
- report any suspected loan fee fraud to the FCA.
