Briefing Note

2018 may have been a disappointing year for equities, but is shouldn’t have been a surprise

December 2018 dished up a rather distasteful present for the holiday period.  Many lines were written in the broadsheets about the global equity market falls, but were they really anything out of the ordinary? 

 ‘Stock market slide in 2018 leaves investors bruised and wary’ The Financial Times (31st December 2018)

Since 2009 (the bottom of the market during the Credit Crisis) global markets have delivered positive returns in eight out of the ten calendar years.  The last negative year for equities was back in 2011, when the markets were down around 7%.  Over the history we have available to us – on average – one in three years deliver negative returns.  Investors have, of late, been extremely lucky. 

Since 2008, in every single year, investors have suffered a fall from a previous market high and many of these falls were larger than 10%. However, even investing at the start of 2008 and suffering the 35% peak-to-trough fall in 2008, an equity investor would have turned £100 into £230, i.e. 8% compounded over 11 years, if they had been disciplined and patient (two known areas of human weakness!). 

As humans, we tend to have a strange view of what invested wealth represents and how we feel about it at any point in time.  We tend to be happy as wealth – at least on paper – goes up to some value at a specific point in time and unhappy when we reach that value again, if it is achieved after a market correction. 

Remember, the true meaning of wealth is having the appropriate level of assets that you require, when you require them, to meet your financial and lifestyle goals.  In the interim, movements in value are noise, somewhat meaningless and part and parcel of investing.  When you invest in equities, you should try to avoid mentally banking the money you (appear to) make on the undulating, and sometimes precipitous, road you are on.  Remember too that the headline equity market numbers are unlikely to be your portfolio outcome, as most investors own some sort of a balance between bonds and equities.

Keeping things in perspective

Investing in equities is always going to be a game of two steps forward and one step back.  What equities deliver from one year to another is of little consequence to the long-term investor, who does not need all of their money back today.

As far as 2019 is concerned, no one who is honest knows what will happen in the markets.  The global economy is still set to grow by 3.5% above inflation this year, according to the IMF, which is not that bad.  Today market prices reflect the aggregate view of all investors based on the information to hand.  If new information comes out tomorrow, prices will adjust to reflect the impact this has on company valuations.  As the release of new information is – by definition – random, so too must price movements be random, at least in the short-term.  Over the longer-term they reflect the real growth in earnings that companies deliver through their hard work, executing the delivery of their business strategies.  In the longer-term, investing in the stock market is a game worth playing, at least with part of your portfolio.

As Benjamin Graham – a legendary investor in the early 20^th Century once said:

In the short run, the market is a voting machine but in the long run it is a weighing machine”

 We could not agree more.

Notes and risk warnings

Use of FE Analytics Data

© FE Analytics 2019. All rights reserved. The information contained herein is proprietary to FE Analytics and/or its content providers.  Past financial performance is no guarantee of future results.

This article is distributed for educational purposes only and must not be considered to be investment advice or an offer of any security for sale. The reference to any products is made only to make educational points and must, in no circumstances, be deemed to be any form of product recommendation.

This article contains the opinions of the author but not necessarily the Firm and does not represent a recommendation of any particular security, strategy or investment product.  Information contained herein has been obtained from sources believed to be reliable but is not guaranteed. 

Past performance is not indicative of future results and no representation is made that the stated results will be replicated.

Errors and omissions excepted.

“Oil falls on middle-east uncertainty.” 

When financial markets are volatile, you often hear that “uncertainty” is the cause. This suggests that uncertainty comes and goes, but because financial markets are forward looking, and because the future is unpredictable, investors must cope with uncertainty all the time.

That can be hard, especially in volatile periods when the value of your investments is fluctuating from day to day. How can investors learn to cope with pervasive uncertainty? 

Pricing-in uncertainty

It is important to remember that the market is a very effective information processing machine. This means that millions of market participants around the world are continually assessing information and its expected effect on future cash flows and that prices change as participants act on this. It is therefore reasonable for you to work on the assumption that today’s market level has priced in current uncertainty.

Benefits of hindsight

Investors can also take comfort from remembering that a globally-diversified portfolio has recovered from many periods of uncertainty and crisis.

For example, in 2008 the stock market dropped in value by almost half. It was a period of uncertainty so acute that the viability of global money markets as we know them came into question. Headlines such as “Worst Crisis Since ’30s, With No End Yet in Sight,” “Markets in Disarray as Lending Locks Up,”  and “For Stocks, Worst Single-Day Drop in Two Decades” were elevated from the business page to the front page.

Every political or economic crisis poses different challenges and affects the market in different ways, but the experience of past events can help investors maintain perspective.

The temptation to react to events can be strong but reacting is not always the best thing to do. In the heat of the moment in the financial crisis, some people decided to sell out of stocks. Those that stayed the course and stuck to their approach have long since recovered from the crisis and benefited from the subsequent rebound in markets.

There have been many periods of substantial volatility in the past. Exhibit 1 (page 3) helps illustrate this point. The exhibit shows the simulated performance of a balanced investment strategy following several crises, including the bankruptcy of Lehman Brothers in September of 2008, which took place in the middle of the financial crisis. Each event is labeled with the month and year that it occurred or peaked.

Although a globally diversified balanced investment strategy invested at the time of each event would have suffered losses immediately following most of these events, financial markets did recover, as can be seen by the three-, five- and ten-year cumulative returns shown in the exhibit. In advance of such periods of discomfort, having a long-term perspective, appropriate diversification, and an asset allocation that aligns with their risk tolerance and goals can help investors remain disciplined enough to ride out the storm. A financial adviser can play a critical role in helping to work through these issues and in counseling investors when things look their darkest.

Conclusion

As we know, predicting future events correctly, or how the market will react to future events, is difficult. The good news is that being a successful investor does not rely on making accurate predictions. It is important to understand that market volatility is a part of investing and to enjoy the benefit of higher potential returns, investors must be willing to accept increased uncertainty. Accurately predicting the future is not a prerequisite to be a successful investor.

A key part of a good long-term investment experience is being able to stay with your investment philosophy, even during tough times. A well‑thought‑out, transparent investment approach can help people be better prepared to face uncertainty and may improve their ability to stick with their plan and ultimately capture the long-term returns of capital markets.

Dimensional On: Markets Rewarding Discipline

Jake DeKinder, Head of Advisor Communication, explains how capital markets have rewarded investors who are able to tune out short-term noise and stay disciplined over the long term.

Click here to view the video.

Appendix

Balanced Strategy 60/40: The model’s performance does not reflect advisory fees or other expenses associated with the management of an actual portfolio. There are limitations inherent in model allocations. In particular, model performance may not reflect the impact that economic and market factors may have had on the adviser’s decision making if the adviser were actually managing client money. The balanced strategies are not recommendations for an actual allocation.

Dimensional All Country World Core 2 Index: Compiled by Dimensional from Bloomberg securities data. The index targets all the securities in the eligible markets with an emphasis on companies with smaller capitalisation, lower relative price, and higher profitability. Profitability is measured as operating income before depreciation and amortisation minus interest expense scaled by book. Exclusions: REITs and investment companies. The index has been retroactively calculated by Dimensional Fund Advisors and did not exist prior to April 2008. The calculation methodology was amended in January 2014 to include profitability as a factor in selecting securities for inclusion in the index.

The Dimensional and Fama/French Indices reflected above are not “financial indices” for the purpose of the EU Markets in Financial Instruments Directive (MiFID). Rather, they represent academic concepts that may be relevant or informative about portfolio construction and are not available for direct investment or for use as a benchmark. Their performance does not reflect the expenses associated with the management of an actual portfolio. Index returns are not representative of actual portfolios and do not reflect costs and fees associated with an actual investment. Actual returns may be lower. See the appendix for descriptions of the Dimensional and Fama/French indexes.

The Dimensional Indices have been retrospectively calculated by an affiliate of Dimensional Fund Advisors Ltd. and did not exist prior to their index inceptions dates. Accordingly, results shown during the periods prior to each Index’s index inception date do not represent actual returns of the Index. Other periods selected may have different results, including losses. Backtested index performance is hypothetical and is provided for informational purposes only to indicate historical performance had the index been calculated over the relevant time periods. Backtested performance results assume the reinvestment of dividends and capital gains.

Source: Dimensional Fund Advisors Ltd.

The views and opinions expressed in this article are those of the author and not necessarily those of Dimensional Fund Advisors Ltd. (DFAL). DFAL accepts no liability over the content or arising from use of this material. The information in this material is provided for background information only.  It does not constitute investment advice, recommendation or an offer of any services or products for sale and is not intended to provide a sufficient basis on which to make an investment decision.

RISKS

Investments involve risks. The investment return and principal value of an investment may fluctuate so that an investor’s shares, when redeemed, may be worth more or less than their original value. Past performance is not a guarantee of future results. There is no guarantee strategies will be successful. Diversification neither assures a profit nor guarantees against loss in a declining market.

Summary

Readers of this note could be forgiven for thinking that the world in general, and the UK specifically, is in a right old state. There’s certainly lots to be thinking about – Trump’s belligerence, China’s debt mountain, Putin’s malevolence, not forgetting Brexit and the prospect of a far-left leaning Labour Government.  This inevitably leads to understandable concern for what this all means for investment portfolios.  This note seeks to reassure the reader that well-structured portfolios are capable of riding out any storm.

What a mess

It is rare that politics is discussed in our articles about investing, but it is evident when turning on the news that it feels like there is much going on in global politics at the moment that is unsettling, complex and confusing at one end, such as Brexit, to the downright worrying and unpleasant at the other, such as Russian meddling in the democratic process and the use of nerve agents on the streets of Salisbury.  There is much in between that is hard to compute in terms of its impact.  Trump’s populism feels unpleasant to many, but is his call to NATO members, such as Germany, to meet their commitments in full to share more of the financial burden of protecting Europe unfair, given Russian aggression? Is his trade war with China wholly a bad thing?  A recent leader in The Economist[1] supports – at least in part – his tirade against its mercantilism and unfair trade practices.  Let’s not forget climate change…

Issues closer to home such as Brexit and the potential for great political uncertainty in the event of no satisfactory (or any) deal being reached, feel – at least to UK residents – more prominent in our lives at this moment than some of these wider issues.

The Brexit affair

Whichever way one voted, it is hard not to be dismayed by the shambles that is Brexit, concocted by all sides.  Until recently, the UK appeared to have no clearly defined strategy. Its negotiations are led by a PM who wanted to remain, receiving criticism from the right wing of her party for not going far enough, and daily criticism from the opposition party, led by a long-time Eurosceptic, that still has no credible alternative aside from six ‘cake-and-eat-it’ criteria that any deal must meet.  For example, Criteria 2 poses the question ‘Does it deliver the “exact same benefits” as we currently have as members of the Single Market and Customs Union?[2]’, which is an impossibility, unless the deal is to remain. What a mess!  One would laugh if the consequences for our nation were not so great.

The EU has hardly covered itself in glory either with their intransigence and deep-seated, implicit desire to make everything so tough that other EU member states won’t dare to follow suit, or that UK voters might change their minds.  Yanis Varoufakis – the Greek finance minister at the time of their debt crisis – revealed the trap that the EU would set for the UK government, in his book[3] about his own experiences of dealing with it.   Did any of our politicians read it?

In the event that any deal agreed gets voted down in Parliament – or there is no deal – we face a high chance that the Conservative government could fall (but will turkeys vote for Christmas?) to be replaced by a far-left leaning government led by Corbyn and McDonnell.  Whatever your own thoughts and preferences on that, the one certainty is that we would be in for a period of radical change.  Certainly that means higher personal taxation.  In Labour’s 2017 manifesto they gave us a clue: a 45% income tax rate to kick in at £80,000 of income, with a 50% rate above £123,000.  This results in marginal tax rates – taking into account National Insurance and tapering of allowances – of 55% for those earning between £80,000 to £100,000, 73% up to £123,000 and 58% thereafter, according to the Institute for Fiscal Studies.  Even before these changes it is interesting to note that 4 in 10 adults currently pay no income tax and the top 10% of income tax payers pay 60% of all income tax[4] and around 30% of all personal taxes collected.  Corporation tax is set to rise from 19% to 26% and the 10% shareholding held for employees – announced by McDonnell at the Labour Party Conference – is likely to be a large new tax on companies, given the £500 limit per employee on dividend income and with the remainder going to HMRC.  Renationalisation of some industries, possibly without full compensation, is not beyond the realms of possibility.  Wherever you sit in terms of the balance between equity (how the economic pie is sliced up) and efficiency (how big the pie is), there is no doubt that we are living in ‘interesting’ times.

The point of this note is to recognise that the world we live in can be an uncertain and uncomfortable place and it can create anxiety over our future wealth and well-being.  It also sets the context for why and how a sensibly structured portfolio can provide considerable comfort for longer-term investors, and how we can put the uncomfortable noise of what’s going on in perspective.

It is not all bad, in fact, far from it

A recent study by the OECD[5] projects that global (after inflation) growth will rise by 3.7% in both 2018 and 2019, with major European economies growing by 1% to 2%, including the UK (1.3%). Growth in the US is predicted to be around 3% in 2018 and 2019.  In the UK, employment is at a record high and real wage growth (after inflation) has been positive since 2015 and the budget deficit is now around 1% of GDP compared to 10% before the austerity program.  Global growth leads to a growth in global earnings, which, when added to dividends paid, equates to the economic return due to equity investors for providing capital.  That’s good news.

The chart below illustrates that markets weather the multitude of World events they experience, rewarding the patient long-term investor, with growth in their purchasing power.

Figure 1: The relentless growth of purchasing power, despite World events (1/1985-7/2018)

Source: Albion Strategic Consulting[6]

The capitalist spirit continues to drive positive change

Since 2016 alone, 90 million people have been lifted out of extreme poverty[7], something that afflicts 8% (634 million) of the World’s population, most of whom live in Sub-Saharan Africa.  South Asia and East Asia and the Pacific have lifted around 0.5 bn and 1 bn people out of extreme poverty, respectively, since 1990[8].  That is on account of the unleashing of the energy and innovation that capitalism has driven in these regions, including China. In terms of infant mortality, the progress has, again, been staggering.  In 1990, on a global basis, infant mortality stood at 65 deaths per 1,000 live births. Today it is less than half that at below 30[9]. This is due to the reduction in poverty and improvement in healthcare and education around the globe, again driven and funded by the wealth that capitalism delivers[10].

Please take the time to view an amazing data visualisation of the World’s progress since 1810 by Hans Rosling[11], a renowned global health academic, to lift your spirits (see footnote 8). It’s a great way to spend four minutes.

We, as humans, tend to hold many misperceptions around important issues, overestimating guesses when an issue worries us and underestimating those that do not.  In part, this is because we rely on the fast thinking part of our brains, which are often not over-ridden by slower, more measured, reasoning[12].  For example in the UK we guess that 37% of the population is over 65, when in fact it is 17%.   We believe that the top 1% of wealthiest people own 59% of the wealth, when in fact it is 23%.  Only 13% of the UK’s population are immigrants, yet we guess at 25%[13].   One can begin to see how polarised political system can use facts and misperceptions to their advantage.

So where does all this leave investors and their portfolios?

You may well be asking yourself whether what is going on in the World affects how your money is invested and if any changes need to be made to your portfolio.  The question implicitly suggests that we can look into the future and know what is going to happen.  If it were that easy, all investors would know what to do and prices would already have moved.  Remember that you are not the only person thinking about these global challenges and all scenarios are reflected in current prices.  As a consequence, we need to rely on the structure of our portfolios to see us through.

We set out three key risks relating to Brexit and how sensible portfolio structures can mitigate them.

Risk 1: Greater volatility in the UK and possibly other equity markets

In the event of a poorly received deal – or no deal – it is certainly possible that the UK equity market could suffer a market fall as it tries to come to terms with what this means for the UK economy and the impact on the wider global economy.  A collapse of the Conservative government and a Labour victory would add further uncertainty.

Risk 2: A fall in Sterling against other currencies

In 2016, after the referendum, Sterling fell against the major currencies including the US dollar and the Euro.  There is certainly a risk that Sterling could fall further in the event of a poor/no deal.

Risk 3: A rise in UK bond yields (and thus a fall in bond prices)

The economic impact of a poor/no deal and/or a high spending socialist government could put pressure on the cost of borrowing, with investors in bonds issued by the UK Government (and UK corporations) demanding higher yields on these bonds in compensation for the greater perceived risks. Bond yield rises mean bond price falls, which will take time to recoup through the higher yields on offer.

Looked at in isolation, these may appear to be significant risks.  Owning a well-diversified and sensibly constructed portfolio, however, can greatly reduce these risks.

Mitigant 1: Global diversification of equity exposure

Although it is the World’s sixth largest economy (depending on how you measure it), the UK produces 3% to 4% of global GDP, and its equity market is around 6% of global market capitalisation.  Many of the companies listed on the London Stock Exchange derive much of their revenue from outside of the UK (around 70% to 80%).  For example, HSBC, even though it is often thought of as a British bank, generates over 90% of its revenues from overseas.  Well-structured portfolios hold diversified exposure to many markets and companies.

Figure 2: Global market capitalisation (developed and emerging markets) – 2018

Source: Albion Strategic Consulting using data from iShares – August 2018 (MSCI ACWI ETF).

Equity markets are always volatile, responding – sometimes materially – to new information.  Despite this, changing your mix between bonds and equities would be ill-advised.  Timing when to get in and out of markets is notoriously difficult. Markets move with speed and magnitude and missing out on the best days in the markets can have material long-term return impacts.  Provided you do not need the money today, you should hold your nerve and stick with your strategy.

Mitigant 2: Owning non-Sterling assets and currencies in the growth assets

In the event that Sterling is hit hard, it is worth remembering that the overseas equities that you own come with the currency exposure linked to those assets.  For example, owning US equities comes with US dollar exposure, as this exposure is not hedged out.  In short, a fall in Sterling has a positive effect on non-UK assets that are unhedged.  The chart below illustrates the impact that currency in unhedged non-UK assets has had over the past decade.  As you can see, at times of market crisis, the Pound has fallen against other safe-haven currencies such as the US dollar.

Figure 3: A falling pound is a positive contributor to portfolio returns

Source: Morningstar Direct© 2018.  All rights reserved.  Data derived from MSCI World Index in GBP, MSCI World Index in Local Currency and MSCI UK Index.

The bond element of your portfolio should have little or no non-Sterling currency exposure to avoid mixing the higher volatility of currency movements with the lower volatility of shorter-dated bonds.

Mitigant 3: Owning short-dated, high quality and globally diversified bonds

Any bonds you own should be predominantly high quality to act as a strong defensive position against falls in equity markets.  Avoiding over-exposure to lower quality (e.g. high yield, sub-investment grade) bonds makes sense as they tend to act more like equities at times of economic and equity market crisis.  Your bond holdings should be diversified across a number of different global bond markets, which mitigates the risk of a rise in UK yields (and thus falling prices), as the cost of borrowing in other markets may not be impacted in the same way, at the same time.

Some thoughts to leave you with

Even if you cannot avoid watching, hearing or reading the news, it is important to keep things in perspective.  The UK is a strong economy with a strong democracy.  It will survive Brexit, whatever the short-term consequences that we will have to bear, and so will your portfolio.  Keeping faith with both global capitalism and the structure of your portfolio and holding your nerve, accompanied by periodic rebalancing is key.  Lean on your adviser if you need support. That is what we are here for.

Perhaps try to catch up on the news only once a week and use the extra time to read about some of the exciting and positive things that are happening in the World.

‘This too shall pass’ as the investment legend Jack Bogle likes to say.

Notes and risk warnings

Use of Morningstar Direct© data

© Morningstar 2018. All rights reserved. The information contained herein: (1) is proprietary to Morningstar and/or its content providers; (2) may not be copied, adapted or distributed; and (3) is not warranted to be accurate, complete or timely. Neither Morningstar nor its content providers are responsible for any damages or losses arising from any use of this information, except where such damages or losses cannot be limited or excluded by law in your jurisdiction. Past financial performance is no guarantee of future results.

Risk warnings

This article is distributed for educational purposes and should not be considered investment advice or an offer of any security for sale. This article contains the opinions of the author but not necessarily the Firm and does not represent a recommendation of any particular security, strategy or investment product.  Information contained herein has been obtained from sources believed to be reliable but is not guaranteed. 

Past performance is not indicative of future results and no representation is made that the stated results will be replicated.

Errors and omissions excepted.

References

[1]      The Economist, September 22^nd – 28^th edition, ‘Hunker down’, page 12.

[2]      www.labourlist.org (2017) Keir Starmer: Labour has six tests for Brexit – if they’re not met we won’t back the final deal in parliament. 27^th March 2016.

[3]      Yannis Varoufakis (2016), And the weak suffer what they must The Weak Suffer What They Must? Europe’s Crisis and America’s Economic Future, New York: Nation Books, 2016

[4]      IFS (2017) www.ifs.org.uk/publications/10038 Note also that an income of a little over £50,000 put one in the top 10%.

[5]      OECD Economic Outlook and Interim Economic Outlook (September 2018) http://www.oecd.org/eco/outlook/economic-outlook/

[6]      Global balanced portfolio: 36% MSCI World Index (net div.), 26% Dimensional Global Targeted Value Index, 40% Citi World Government Bond Index 1-5 Years (hedged to GBP) – no costs deducted, for illustrative purposes only. Data source: Morningstar Direct © All rights reserved, Dimensional Fund Advisers. Past performance is not indicative of future performance.

[7]      World Poverty Clock www.worldpoverty.io (worth a look at how poverty is reducing).

[8]      The Economist, September 22^nd – 28^th edition, ‘Poverty estimates’, page 65.

[9]      World Bank (2017) https://data.worldbank.org/indicator/SP.DYN.IMRT.IN?end=2017&start=1990

[10]    For any reader interested in a more positive outlook, Matt Ridley’s book ‘The Rational Optimist’ is a good read

[11]    Hans Rosling’s data visualisation. https://www.youtube.com/watch?v=jbkSRLYSojo – a brilliant four minutes!

[12]    Nobel Prize winner, Daniel Kahneman’s book ‘Thinking fast and slow’ is a great read on this subject.

[13]    Data source: Bobby Duffy (2018), ‘The Perils of Perception: why we are wrong about nearly everything’.  Bell & Bain Ltd. Glasgow.  A great read on the subject.

New analysis has the answer

A look back over 10 years reveals the markets where human fund managers are most likely to earn their keep

British savers had a 50:50 chance of picking an “active” fund that managed to beat simple automated rivals over the past decade, research for Money Telegraph has established.

The study, by Morningstar, the data firm, worked out how many funds run by a human stock-picker beat the best performing “tracker” funds in six regions over various time frames.

The data, summarised in the graphic (see page 3), makes interesting reading at a time when investors are increasingly turning their backs on City stock-pickers and turning instead to tracker funds, which offer low-cost exposure to a particular stock market. Three years ago tracker funds held £60bn of British savings, but this figure has now leapt to just shy of £100bn.

Some of the results are surprising and conflict with previous academic studies which concluded that a monkey with a pin could do a better job picking shares than a highly paid fund manager.

What the chart shows

The graphic outlines the chances of an active fund manager beating the best-performing tracker of the relevant index over the past three, five and 10 years. The six markets picked – the UK, US, Europe, Asia, Japan and global markets – are among the most popular with British investors. Our analysis looked at “growth” funds, those that aim simply to increase in value over time, and did not include income funds.

Active funds fared better relative to trackers over the longer time frames in the study.

This was especially true of funds that buy European shares, with 70pc of actively managed European funds beating the best European tracker over 10 years. Among Asia funds, 55pc of active portfolios beat the best tracker over a decade, while the figure for the UK was 52pc.

Forty-eight per cent of global funds with human managers outperformed the best passive fund over 10 years, compared with 38pc of Japanese funds. In last place were active US funds, only a third of which managed to beat the top tracker.

Overall, 50pc of active funds beat tracker funds over the past decade. The figures are net of fund charges.

What the experts say

Financial advisers such as Philippa Gee, of Philippa Gee Wealth Management firm, said the data showed savers should not favour one strategy over the other and should instead hold a mixture of the two.

“It [belief in either active funds or trackers] has become a religion to some investors, to the extent that they are not prepared to weigh up the other side of the argument and will only talk up the merits of one strategy and criticise the other,” she said.

“When I invest personally and for my clients, I use both. Tracker funds are better in some markets and much cheaper, but there are certain fund managers who deliver superior returns and are worth paying a premium for.”

Our findings, which found a one in two chance of picking an active fund that outperforms, paints fund manager as more skilled than other research has done in the past.

Last summer the Pensions Institute at Cass Business School, the respected academic body, issued a damning study into active funds. It found that 99pc failed to beat the stock market between 1998 and 2008, returning an average of 1.4 percentage points less than the market each year.

Professor David Blake, the author of the research, said at the time: “Based on the findings, just 1pc of fund managers are ‘stars’ who are able to generate superior performance.”

Commenting on our research, Prof Blake said: “Over the longer 10-year horizon, the results in most markets tend to converge to the 50pc level – that is, an equal chance of outperforming and underperforming the market. This is what you would expect.

“Ultimately investors need to decide whether they want to flip a coin. The three and five-year numbers flatter the active funds due to the bull market equities have enjoyed since the financial crisis and are not an indication of fund manager skill.”

Why do fund managers perform better in certain markets?

As the chart shows, the chances of an active fund beating a tracker vary from one region to another. Experts say there are reasons why fund managers are able to gain an edge in certain markets and not in others.

Jeremy Beckwith, an analyst at Morningstar, said shares in smaller companies, which have more scope to grow quickly than their larger peers, were poorly represented in tracker funds because the funds’ stakes are proportional in size to the companies’ representation in the index.

In the UK, for instance, the FTSE All Share Index, which most tracker funds aim to replicate, is dominated by the 10 biggest companies. These heavyweight shares, which include BP and Vodafone, make up more than a third of the index.

A fund that can take significant stakes in small companies has the scope to outperform a tracker, whose fortunes are strongly influenced by this small group of huge companies. (It also has more scope to underperform, of course.)

In the case of Europe and Asia, successful fund management is all about buying the “right countries”.

Mr Beckwith said: “Both economic and political factors can change quickly and either negatively or positively impact on how that country’s stock market performs. The fund managers are paid to switch the money around when they see fit to either take advantage or protect capital, whereas the tracker funds do not have this freedom.”

The fact that active funds in America struggled to beat trackers will come as little surprise to the more experienced investor.

The majority of US funds, over both short and long time periods, fail to beat the S&P 500 index.

Why a tracker fund works in Europe but not in the US (for now)

Fund analysts say this was because so much attention was lavished on American companies, with analysts poring over their accounts, making it tough for US fund managers to find mispriced shares.

Mike Deverell of Equilibrium, the wealth manager, said: “The US is seen as a very efficient market with every stock followed by hundreds of professional analysts. This makes it very difficult to spot a bargain. We only use tracker funds for clients who want exposure to America.”

But the analysts could not put their finger on why Japan funds fared so badly. Mr Beckwith suggested: “Perhaps it is just because there are not many decent fund managers who invest in the region.”

Is the data reliable?

Yes, but as Prof Blake said, the bull market since 2009 may have helped active funds.

There is, however, another factor that could have given active funds a boost relative to trackers over the past 10 years. At the start of that period tracker funds were much more expensive than they are today. This will have put their average cost over the period up and reduced their returns after fees were taken into account.

Ms Gee said: “It has only been in the past five years or so that tracker fund costs have come down. Some had fees similar to active funds, but some are now 10 times cheaper.

“It will be a different story over the next 10 years. Active funds now have a much bigger hurdle to beat, given that today the cheapest trackers cost as little as 0.09pc and active funds tend to charge 1pc.

“There is now a bigger gap for fund managers to bridge and only the most skilled investors will be able to do it.”