INVESTORS who hold funds that secretly track the stock market are being urged to dump them in favour of genuine active funds.

Experts say investors are wasting millions of pounds on high fees for active management when most funds effectively follow a stock-market index. A handful, however, have the potential to outstrip the market.

Last week Nicola Horlick, a high-profile fund manager with SG Asset Management, was accused by Sir Mark Weinberg, chairman of St James’s Place, a financial-services firm, of running a closet tracker even though he was paying her a six-figure sum to seek out shares that could beat the market.

She strongly denied the claims, but Weinberg has still withdrawn SGAM’s mandate to manage more than £500m of his clients’ money.

Horlick is not alone. Many of Britain’s biggest funds, including Abbey National UK Growth, Nationwide UK Growth and Prudential UK Growth, also stand accused of effectively tracking an index, even though they claim to provide active management and charge higher fees as a result.

The average active fund charges three times the fee on an index tracker — 1.5% a year instead of 0.5%.

Experts say investors should consider quitting closet trackers. If you are happy to follow the index, opt for a true tracker with low charges. If you want the potential to beat the index, go for a genuine active manager. But how do you find them?

FIRST, check the fund’s fact sheet to see if the manager is constrained. Some managers have complete investment freedom, while others are restricted and will therefore never outperform the index by a big margin.

Gartmore UK Growth, for example, is a highly constrained fund. If a stock accounts for 5% of the index, say, it can deviate from this weighting by only plus or minus 1.5%. For sectors, it can diverge by only 3%.

Bestinvest, an adviser, has worked out that 30% of this fund is effectively run as a tracker, yet the group charges investors an annual fee of 1.5%.

Steve Marriott of Bestinvest says: “Investors are paying for active management but not getting it. This fund is on our sell list.” In the past three years the fund has plunged 41%, while over five years it has fallen 34%.

Some firms, however, have launched funds that are designed to diverge from the index for above-average returns. They include Artemis UK Special Situations, Framlington UK Select Opportunities, Gartmore UK Focus, JPMF UK Dynamic and Schroder UK Alpha Plus.

The funds do not have to follow rules governing how much or how little they can invest in a stock or sector. In most cases, they also hold a more concentrated portfolio of stocks — 30 to 40 compared with more than 50 for conventional funds.