THE average investment fund has seriously under-performed its market index over the past 10 years, despite the far higher costs of active funds over trackers, new research has found.

The UK index was up 62% and the average fund only 50%, while in Europe, US, Japan, emerging markets and Asia Pacific the index also beat the average fund by a significant margin. Only in the UK small-company sector did the average fund perform better the index.

Patrick Connolly at advisers AWD Chase de Vere, who produced the research, says the new advisory regime from next year will put the pressure on fund managers to disclose costs, and to perform. "Actively managed funds will need to clearly demonstrate they can outperform in order to justify their higher charges otherwise they will find investors heading for the exit door," he said. "This should lead to more passive offerings, investment companies reducing the number of actively managed funds they run, and reducing charges on many they retain."

AWD says in many cases investors would be better off with lower-cost passive funds but claims there are "a select number of actively managed funds which can demonstrate consistent out-performance of the benchmark index and the sector average".

Its research shows how a 'selected fund' in each sector outperformed the index and the average fund in at least five of the last 10 years in all sectors (seven in the UK), though in up to four years the index was the best performer. In four of the 10 years, however, the average UK and US fund did beat its index.

Alan Dick, of Forty-Two Wealth Management in Glasgow and a proponent of tracker funds, said: "In order to provide significant outperformance, managers need to create highly concentrated portfolios that differ significantly from the index.

"This is a major gamble for investors. If it pays off, the manager is a star, if it doesn't, he is a flop."

The research comes as the Financial Services Authority is examining the standard projections used by fund managers to illustrate possible investment returns. A report by PricewaterhouseCoopers has recommended lowering the 'intermediate' assumed return from 7% to 6%.

Some investment advisers believe fixed-rate projections are of little use and can give investors a false impression. Gregor Johnston, director of Glasgow-based independent financial advisers Fitzallan, says: "We try to avoid giving people concrete expectations (of investment returns) because it can lead to misapprehensions. We don't have a crystal ball and neither does the FSA. "

Craig Yeaman, of Saracen Fund Managers in Edinburgh, says: "You can make certain assumptions but if the stock market falls by, say 30%, as it did in 2008 then the reality will be different. Our objective is to outperform the FTSE All Share Index and over the last 13 years our Saracen Growth fund has achieved that... but capital values will depend on market conditions."

Fitzallan shows clients the 100-year Barclays Equity Gilt Study, which shows that over a 10-year period there is a 90% probability that shares will outperform cash deposits, and a 79% probability that they will outperform gilts.

Mr Johnston says: "It shows that investors should get a greater reward for taking more risk in the long term although shorter periods of five to 10 years can throw up deviations."

The standard projections, however, are critical in showing how much each fund's charges will eat into the same assumed returns.