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The global boom in Exchange Traded Products (ETPs) can blind investors to actively managed funds. Promoters of index investing overlook the benefits of well-managed active funds that consistently outperform the sharemarket over long periods. I have never subscribed to the active/passive debate. Actively managed funds, where professional managers try to outperform their benchmark index, and charge higher fees, have their place in portfolios.  Similarly, ETPs, passive funds that aim to replicate the price and yield performance of an underlying index, help investors achieve certain goals. It is not a question of one fund style over the other, but rather using the best tool for the job at hand. Parts of portfolio construction, such as large-cap Australian equities, lend themselves to indexing, for some investors. Others, such as global investing or small-cap equities, benefit from professional managers who can navigate tricky markets. 
Nevertheless, I understand reservations about actively managed funds. The majority of these funds underperformed their relevant index, as found by the Mid-Year 2016 S&P Dow Jones Indices Versus Active Funds (SPIVA) Australia Scorecard.
Put another way, investors paid higher fees (compared to ETPs) for active funds that performed worse than their index. Over five years, 69 per cent of actively managed funds in large-cap Australian equities were beaten by their index. 
Investors would have received a higher return, at much lower fees, using ETPs that replicated the index return. The collective underperformance of actively managed funds – consistent over many time periods – is the ETP sector’s strongest selling point.
Another problem with active funds is performance longevity. Some funds perform well during certain market conditions and struggle in others. Some funds suffer when core personnel leave and the investment process changes or is applied inconsistently.
Finding actively managed funds that perform over a full economic cycle is hard work. But the pay-off is high when these funds consistently deliver double-digit returns, at lower risk. 
Morningstar’s latest Australian equities sector wrap, released this week, includes an insightful analysis on actively managed funds that stack up over long periods.  
The global funds rating house set out to identify 10 actively managed funds (in large-cap Australian equities), across all investment styles, that have produced ‘highly dependable’ and ‘consistently outstanding’ returns for investors. 
Morningstar eliminated funds that had less than 10 years of history. By choosing 10 years as the criteria, Morningstar analysed funds that navigated the Global Financial Crisis, euro-debt crisis, mining bust, energy price crash and Brexit. Fifty funds met its criteria.
Then Morningstar ranked each funds’ annual performance against its peers over 10 years, and added the scores over the decade to deduce the best funds.
Only five investment houses featured in the top 10: Fidelity, Hyperion, Investors Mutual, Perpetual and Platypus Asset Management (some managers had multiple funds that made the top 10). That reinforces the value of focusing on the investment house’s reputation, personnel and investment process when choosing funds. 
“One characteristic stands out among our top 10 performers: investment process stability,” wrote Morningstar. “The fund managers who can stand the market running against them and maintain the same investment philosophy and process year after year prevail. 
Morningstar added: “Obviously, not all investment processes provide a competitive advantage, but clearly a repeatable, consistently applied investment process will ultimately provide a solid competitive advantage for a fund manager.”
A surprise was the high number of value strategies that made the top 10. The last few years have supposedly been an Australian market for stock pickers and growth companies. But the best value managers have shown they can find opportunity in all market conditions.
The top 10 funds were: 
• Fidelity Australian Equities• Hyperion Australian Growth Companies• Investors Mutual WS Australian Share• Investors Mutual WS Industrial Share• Perpetual Wholesale Concentrated Equity• Perpetual Wholesale Shares Plus L/C• Perpetual Wholesale Australian• Perpetual Wholesale Industrial• Perpetual Wholesale Ethical – SRI• Platypus Australian Equities – Wholesale
Fidelity Australian Equities, for example, has a five-year annualised return of almost 12 per cent. Hyperion Australian Growth Companies has delivered almost 15 per cent over that period. Most of these funds produced 12-15 per cent annual returns.
Often overlooked is the ‘risk’ side of these returns. These funds have been able to deliver attractive returns with less volatility than the overall sharemarket. Too many investors only focus on returns and overlook the ‘risk-adjusted return’.
Many investors would be happy with 12-15 per cent annual returns over the past five years, knowing that the market’s best investors are managing their money, and that the funds invest in own dozens of stocks, thus aiding diversification. 
For conservative investors, active funds are a better approach than punting on individual stocks that have far higher risk. The challenge is finding funds that justify their higher fees over a full economic cycle – and appeal more than ETPs.
That only five investment houses made Morningstar’s top 10, out of dozens of fund managers, shows the challenge. 

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Tony Featherstone is a former managing editor of BRW and Shares magazines. The information in this article should not be considered personal advice. The article has been prepared without considering your objectives, financial situation or needs. Before acting on the information in this article you should consider its appropriateness, regarding your objectives, financial situation and needs. Do further research of your own or seek personal financial advice from a licensed adviser before making any financial or investment decisions based on this article. All prices and analysis at February 16, 2017.