Are the days of the star fund manager numbered? Investing via indices or derivatives can be far cheaper and research shows that very few active managers can consistently add value.

In the UK, a large part of the funds management industry is built on a belief in highly talented individuals who have the skill to ride the market, picking the best stocks for their funds.

Funds management houses spend millions on promoting their best managers, and financial advisers often follow these stars when they move between different firms.

There is, of course, a strong commercial vested interest in the star manager phenomenon.

Mutual funds pay commissions to those advisers that recommend them and the performance of a skilled manager is a good story for an adviser to give to his clients.

But with the advisers’ costs added to fund fees, clients arguably pay over the odds for often mediocre investment results.

It will be interesting to see how this system and its anomalies cope with the ‘treating customers fairly’ initiative from the Financial Services Authority.

Earlier this year, one large fund manager told CoreData it was wrestling with the question of whether it should continue to sell its own funds directly to a section of its customers, given that they could access the funds at a lower cost through brokers that discount its initial charge.

A more direct challenge to the total expense ratios of actively managed funds is coming from exchange-traded funds (ETFs) and investment firms using derivatives contracts to invest at minimal expense.

ETFs do not pay a commission and have lower charges than managed funds, while derivatives are even cheaper.

Courtiers, a small UK investment firm, said it faced costs of £300,000 in broker commissions and stamp duty for a £22m investment in the FTSE 100 index via securities, or a total cost of £4,000 with a swap contract. With another derivative, it bought £1m of exposure to the German Dax index for just £12.

Not only are active mutual funds, with star managers, far more expensive to run, but investment statistics show that actively managed funds underperform on average.

Supporters of ETFs and derivative investing also point out that, according to the Brinson, Hood and Beebower report in 1986 (Determinants of Portfolio Performance, Financial Analyst Journal), asset allocation accounts for 91.5% of return variability.

Pointing this out to those who believe in stock selection and star managers is rather like bringing up the theory of evolution with a believer in creationism.

ETFs and exchange-traded commodities have had a cracking year so far, as more investors have used them for cheap market exposure.

Weaning financial advisers and fund managers off active funds and their star names will be hard, given the commercial interests and the difficulties in performing a U-turn, but a slow transition could be underway in the UK as more investors and managers shift to cheaper investment tools.