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DIY-investors are ‘better off buying shares directly’

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Self-investors can achieve far greater profits if they buy shares directly rather than via a managed fund, says a new report.

Just 2% of managed funds beat the average annual returns from the companies listed on the London Stock Exchange over the last five years, according to research by Insight Financial Consulting.

The report analysed a random sample of 1,685 managed equity funds spanning Europe, Asia, Australasia and North America, all of which are available directly to the UK investor.

It revealed that if a private investor had bought the same shares in companies listed on the LSE, they could have expected an average return of 15.6% per annum from the share price growth as well as dividends between 2008 and 2013.

This would have returned an average of 106.4% assuming all dividends were reinvested. This figure excludes investment trusts.

More than a quarter (28%) of funds analysed delivered returns of less than 5% per annum between 2008 and 2013; one in eight failed to keep up with inflation; and one in 30 would have handed back less than the original investment.

David Meckin, managing director of Insight Financial Consulting, said: “Although the managed fund industry is huge, the rewards from many of the funds are far less modest, with a one in eight funds actually losing you money in real terms. Based on our sample, less than 2% of funds were able to deliver returns in excess of the average market rate of return available on the London Stock Exchange.”

Choosing a managed fund vs. buying shares

  Shares Managed funds
Average annual return 2008-2013 15.60% 7.03%
Average five-year return 106.42% 40.49%
Best five-year return N/A 172.5%
Worst five-year return N/A -44.40%
 source: Insight Financial Consulting


Meckin continued: “Even investing in these funds is no guarantee they would outperform the market in the future. As fund managers are quick to point out, ‘past performance is not a guide to future performance’.

“For the self-investor, all it takes to see their money grow and achieve strong returns is education and the confidence to take their money into their own hands.”

Figures from the Investment Management Association suggest its members currently manage £4.2trn of assets in the UK and overseas – equivalent to £66,000 for every man, woman and child in the UK.

The report suggested that had an investor put this amount into a managed fund five years ago, they would have typically incurred a 5% initial fee (£3,300) plus annual management fees of 1.5% (totalling £4,950) – a commitment of £8,250 with no performance guarantee attached.

However, Chelsea Financial Services warns that investing in individual stocks comes with its own risks. 

Juliet Schooling, research director at the firm, said: “If you compare like for like, the average UK All Companies fund outperformed the UK market in 2009, 2010, 2012 and so far in 2013. 

“The risks with buying your own shares rather than a fund is that most of us are not rich enough to be able to buy more than just a handful of shares, so you don’t get the same diversification and therefore are taking more risk.

“Also, most people don’t have the time, resource or skill to analyse and research all the stocks in the market to find the best opportunities and if you get it wrong you could lose a lot of money (think investing in banks in 2008!).

“And while the report has looked at the cost of funds, it is a little misleading as, for example, our company discounts all initial charges on funds, and the cost of buying and trading shares has not been addressed – it’s not free. Most people will be better placed owning funds and perhaps one or two shares if they wish.”

Adrian Lowcock of Hargreaves Lansdown added: “Any investor still being charged 5% to buy their favoured fund should review their investment arrangements immediately. In addition, whilst an AMC of 1.5% is common, investors can reduce this cost by using a broker who offers a Loyalty Bonus.” 


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