Few actively managed funds consistently beat passive 'trackers'.
New research shows that millions of investors are wasting their money paying for a fund manager because the majority fail to beat the cheapest tracker funds.
Active fund managers charge higher fees because they research and select the stocks they believe will deliver superior returns, rather than simply following a given stock market.
However, while some manage to beat the market over short time frames, the vast majority fail to do so consistently over the longer term.
The research, by AWD Chase de Vere, the advisory firm, showed that in almost every sector the average fund had failed to beat the relevant stock market over both five and 10 years. In some cases the "average" fund has delivered almost 70pc less than its relevant benchmark index.
Over a 10-year time frame, in most sectors, more than twice as many active fund managers underperformed when compared with those who beat the market; in some sectors this falls to just one manager beating the market for every six that don't.
The research also blows apart the myth that it is only in liquid, highly researched markets such as Britain and America that trackers tend to outperform. The statistics show that fund managers running emerging market and Japan funds have an ever worse record over 10 years.
In the UK All Companies sector, the average fund delivered 123pc (after charges) over the past decade, compared with a 132pc rise in the FTSE All Share Index an underperformance of 9 percentage points. The average fund underperformed by 11 percentage points in the US, 16 in Europe, 45 in Asian equities and 68 in emerging markets.
The only sector in which active fund managers seemed to be able to hold their own was the UK Smaller Companies market, where over the past 10 years the average actively managed fund has delivered a 213pc return, compared with a 110pc rise in the FTSE Small Cap index.
The larger the average drop, the greater the percentage of fund managers who underperform. In the UK market 61 fund managers outperformed the FTSE All Share index over the past 10 years, compared with the 105 who did not.
When we look at the Asia funds offered to British investors, just nine fund managers outperformed, but 31 failed to beat their benchmark. In the emerging market sector it was even worse, with just three fund managers beating the market, while 18 did not.
Patrick Connolly of AWD Chase de Vere said: "Our research shows that many investors are continuing to waste money by paying active management fees for consistent underperformance."
Too often investors focus on short-term performance figures or "flavour-of-the-month" funds rather than funds with a longer track record, he said.
Mr Connolly didn't dismiss active managers completely, pointing out that the handful who have a consistent record (see panel, right) can significantly boost the value of your portfolio.
He added: "Most investors should probably hold a combination of active and passive funds. But if they aren't confident that their actively managed funds will outperform, they should look at passive alternatives."
Other advisers agreed that the recent ban on commission payments should lead to a renewed focus on the costs of investment and more advisers recommending passive funds, such as trackers and exchange-traded funds.
Philippa Gee, who runs her own wealth management firm, said: "Because the cost of investment is now much more transparent, investors will rightly start to question what benefit they receive for the cost involved."
However, while reducing the cost of investing is important, she stressed that this didn't necessarily remove risk, and first and foremost you must ensure you are invested in an appropriate asset.
Jason Hollands, the managing director of Bestinvest, added: "It is undoubtedly true that most active funds underperform over the long term. This isn't just down to poor decision making, it is also in part down to the higher fees they carry, as it means the manager needs to outperform the underlying market return just to tread water against it.
"If you are going to invest in active funds then you don't want to buy an 'average' manager you need to be super-selective."
He said he favoured a mixture of active and passive funds. "It would be wrong to take a blinkered view and limit your options exclusively to one or the other, as some advisers seem to suggest."
However, he warned investors to be wary of advisers who have suddenly had a "Damascene conversion" to passive funds, after new rules on disclosing commission and charges. "Sceptics would say this is to limit fund costs, rather than reducing their own margins."
Investors should also choose their passive funds carefully, as there can be significant variation in costs, even between passive funds tracking exactly the same index. As Mr Connolly pointed out, HSBC (LSE: HSBA.L - news) 's UK index fund, bought via an adviser such as Bestinvest, has a total expense ratio (a measure of initial and annual costs) of just 0.27pc. In contrast you will pay a thumping 1pc for Virgin's UK Index fund.
Ms Gee also recommended sticking with low-cost trackers, although she added that exchange-traded funds could be another option and an additional diversification for more sophisticated investors.
For a "plain vanilla" fund, she liked Vanguard's FTSE UK Equity Index fund, which has an AMC of just 0.15pc. For those looking for global diversification she recommended HSBC's World Index Dynamic fund, which has a 0.5pc annual fee.
Exchange-traded funds have helped drive down costs, but investors need to be wary, as some of these funds (known as "synthetic" ETFs) do not necessarily buy the assets they are tracking. This can lead to additional risks, particularly in less liquid markets.
ETFs can be traded at any time, rather than once a day, and the costs are more aligned to the cost of dealing in a share rather than holding a unit in a fund. They often follow more obscure indexes, such as the price of gold, overseas currencies, or even the price of coffee or wheat.
= ACTIVE FUNDS BEATING THE ODDS=
Axa Framlington UK Select Opportunities
Nigel Thomas has managed this fund for the past decade, during which time it has grown to £3.4bn. He invests in large and mid-sized British companies, trying to stay one step ahead of the market by looking for those that will benefit from tomorrow's trends.
10-year performance: 239pc
UK All Share index: 131pc
Cazenove UK Opportunities
Julie Dean has managed this fund for the past decade, during which time it has consistently outperformed. The main hunting ground for the fund is large and mid-cap UK stocks, and it looks for those companies that are poised to benefit according to where we are in the business cycle. This approach gives the fund the opportunity to outperform by investing in quality companies with good earnings growth.
10-year performance: 248pc
UK All Share index: 131pc
Alexander Darwell has managed this fund for 12 years. His outperformance is due to his stock-picking capabilities, as he is a "bottom-up" manager who takes big bets on individual stocks or sectors, and can also invest heavily in small and medium-sized European companies. Because of this approach, the performance is often significantly different from the benchmark index.
10-year performance: 249.7pc
FTSE Europe (ex UK) sector: 149pc
Threadneedle American Selec t
Cormac Weldon has managed this fund for 11 years and adopts a more punchy and aggressive approach than the Threadneedle American fund, which he also manages. This fund looks for undervalued or turnaround US companies and can also invest in smaller and emerging growth stocks, and so, unsurprisingly, tends to perform better in a rising market.
10-year performance: 101.3pc
S & P 500 index: 84.9pc
First State Asia Pacific
Angus Tulloch has managed this fund for the past 25 years, and such has been his success that the fund has been "soft closed" for new investments. This is a sensible approach as it protects existing investors. The success of the fund is down to limiting losses during falling markets.
10-year performance: 423.5pc
FTSE Asia Pacific (ex-Japan) index: 329pc
Aberdeen Emerging Markets
Devan Kaloo has headed this fund for nine years, although Aberdeen adopts a very strong team-based approach to investment management. The fund has consistently outperformed in both rising and falling markets. As a fund management house, Aberdeen takes a long-term approach, meaning stock turnover is low, and it never invests without first meeting a company's management.
10-year performance: 568.4pc
FTSE Emerging index: 382.9pc
Invesco Perpetual Japan
Paul Chesson has managed this fund for 12 years. It has proven incredibly difficult for active managers to outperform in Japan and Chesson has experienced some difficulties, but he has managed to outperform over the past decade with a bias toward large and mid-cap Japanese stocks.
10-year performance: 74.4pc
Nikkei 225 index: 66.4pc
(All performance figures are to Dec 31 2012)