ABOUT FINANCE: In retrospect, it is easy to see which equity funds have beaten the average. It is much harder to pick them out in advance.
Norwegian retail customers had NOK 271 billion in equity funds at the end of 2021. It is a widely used form of savings, although much more is saved in the bank.
There are hundreds of mutual funds with different content to choose from. Anyone who wants to put savings in equity funds is faced with at least two choices:
- actively or passively managed fund?
- if active fund, which?
Cheap and reliable
Passive funds, also called index funds, spread the money outwards in accordance with the size of the individual companies. If a company becomes more valuable on the stock exchange, it increases its share of the total. The index fund will automatically increase its position accordingly.
The advantage of index funds is that they are cheap. Typically, they cost about 0.25 percent of the money that is under management. It is a bit sturdy and boring, but will usually be relatively safe. In Norway and internationally, the trend has been strong growth in such funds.
Expensive and fresh
Those who want to invest more freshly can choose actively managed equity funds. These are more expensive than passive funds. Typically, they cost 1-2 percent of the money managed.
For this additional payment, managers will try to select shares so that the fund does better than a stated basis of comparison. If the active fund places the money on the Oslo Stock Exchange, the managers will try to beat the average for this.
If they invest money in the entire world stock market, they will try to beat the average for the world stock exchanges.
There are also actively managed industry funds that invest in, for example, technology companies, health companies or environmental companies. Then managers try to beat the average for these industries.
An eternal discussion
There is an eternal discussion in the financial industry and among academic economists whether it is possible to beat the market in the long run. This means delivering long-term extra returns to those who pay extra for active equity funds.
The active managers themselves will claim that this is possible. Others reject this. The passive funds’ very strong growth in market share in recent decades shows what a majority of fund savers are investing in.
Buying an actively managed fund is of course no guarantee of a better-than-average return. It would be what economists call “a free lunch”, and as is well known, it does not exist.
Active funds provide the opportunity to beat the average, but there is also the opportunity to do worse than average. The rashes can be large both ways.
So, how to choose active fund?
The story as a forecast?
Historical returns the closest starting point. A start can be to check what extra return the individual funds have given in the past over the savings horizon one imagines. It’s the most tangible thing we have. And maybe the only thing.
For several years, Aftenposten has compiled the returns in the active equity funds over different time horizons up to 15 years. The overview for 2021 was published on Monday.
The figures show that almost all selected equity funds gave super returns last year, calculated in relation to the bank deposit’s (near) zero interest rate. Everyone can in and of themselves enjoy themselves. But for the actively managed funds, a special requirement must be set: Did they beat their basis of comparison?
The answer to the question should not drown in the fact that the overall market has gone very well.
Bad and good in equal measure
The main picture is that the results for the most common active equity funds for a given year are a mixture of good and bad, calculated in relation to the basis of comparison.
“Good” and “bad” are divided into approximately equal groups year after year. But it changes over time which individual funds do well, and it also changes between different fund providers.
In any case, long-term returns are more important than what happened last year.
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Some funds and some suppliers do consistently better than their basis of comparison year after year. It looks impressive. But history shows that many successful active managers get hit sooner or later. In the meantime, they have attracted a lot of money.
A few manage to deliver impressively long. Others deliver poorly over a long period of time, but are strong in the belief that it will turn around. Faith is strengthened by replacing the managers who sit in front of the screens in the various funds.
“Historical returns are no guarantee of future returns”, it says where equity funds are marketed. Preferably in small print. The future is uncertain, and this also applies to what the active managers can achieve.
Place Aftenposten’s large table on the table or record it on the screen. Look at the mix of red and green numbers for the last five, ten and 15 years. Look in particular at the major fund providers DNB, Skagen, Odin, Handelsbanken and Storebrand. Ask the question: Which funds will do well in the future?
Raise your hand to the one who dares to answer.
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The savings in equity funds more than doubled since before the pandemic