‘Vanguard let me down – should I own only active funds?’

The debate between investing passively, where a fund simply tracks a stock market, and investing actively, where a human stockpicker is trusted to beat the market, is one of the first things a DIY investor comes across.

Sean Jones*, 58, from Lancashire, believes both styles have their merits and has split his portfolio between active and tracker funds.

However, Mr Jones, a financial consultant, has started to doubt whether his strategy works given how well the active funds in his £ 370,000 portfolio have performed.

Baillie Gifford Managed and Liontrust Sustainable Future Managed, “mixed-asset” funds that own stocks and bonds, have returned 250pc in the past decade. By contrast, his passive mixed-asset pick, Vanguard LifeStrategy 80pc Equity, has gained just 175pc.

“While the Vanguard fund has performed well, it remains the laggard in my portfolio and I am considering switching it to an active alternative,” he said.

Mr Jones would like to diversify his portfolio more as it is heavily dependent on Baillie Gifford, a Scottish fund group known for buying fast- growing but potentially volatile stocks.

“My strategy is to grow my pot by adopting a ‘multi-asset’ approach – owning both stocks and bonds – with the addition of a couple of racy, growth- oriented stock market funds. The current portfolio has £370,000 in it and I am adding £10,000 a year. I want to retire in five years: will I have £600,000 by then?” he asked.

Ben Yearsley Investment director at Shore Financial Planning

Mr Jones has set himself the ambitious target of making 10pc a year over five years. With this in mind, he should ditch his Vanguard tracker and go active instead.

There are two reasons for this. First, the 20pc invested in bonds in Vanguard LifeStrategy 80pc Equity will drag down returns as bonds are likely to return less than stocks. Second, passive funds are unlikely to make the 10pc a year he requires, whereas active funds at least have a chance.

Even so, his target is still incredibly ambitious. Long- term returns from stock markets average around 7pc a year. To achieve more than this he needs to take more risk, which also brings a greater chance of failing just before he retires.

To add more growth to his portfolio, while reducing dependence on Baillie Gifford, he could drop his “mixedasset” funds entirely and own just Scottish Mortgage from Baillie Gifford, which is its flagship fund. Alongside this he could add other “growth-focused” funds such as Blue Whale Growth, Montanaro UK Smaller Companies trust and FSSA Asia Focus.

If this is too racy as he nears retirement, he could stick with “mixed-asset” funds for around 60pc of his portfolio and then add other funds alongside this core, such as Martin Currie European Long-Term Unconstrained and Fidelity Asia Pacific Opportunities.

Rob Burgeman

Investment manager at Brewin Dolphin Given the bond investments in Vanguard’s 80pc equity fund, keeping it would be an error as bonds would drag on returns and make a 10pc annual return extremely difficult to achieve.

Passive funds have their place in a portfolio but a better option would be a global stocks tracker, such as the iShares Core MSCI World Ucits ETF, which just owns stocks.

That said, his portfolio as it is has delivered decent returns. It could be improved if Mr Jones sold some of his Baillie Gifford funds. The firm accounts for nearly three quarters of his portfolio, which is a risk if its “growth” investment style falls out of favour.

Other fund managers who have produced excellent longer-term returns have been Nick Train, whose Lindsell Train Global Equity has delivered 95pc over the past five years, equivalent to 14.3pc a year, and Terry Smith, whose Fundsmith Equity fund has delivered 126pc, equivalent to 18pc a year over the same period.

However, Mr Jones needs a plan B as achieving his target of having £ 600,000 when he retires is a tall order.

He could push back his retirement by two years as turning £370,000 into £600,000 over seven years requires a 7pc annual return, which is far more achievable. Sam Benstead *see note on page 11

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