Markets have been tough for stock pickers over the past 12 months. When it comes to beating benchmarks, actively managed funds failed to deliver last year.
The expectation was that the market rout prompted by Covid would provide the opportunity for active managers to prove their worth.
Data from Morningstar showed that for the first six months of 2020, 52.4% of active funds both survived and outperformed comparable passive funds. Now fresh research shows performance was not much better for the whole year, with 50.2% of almost 19,000 funds analysed faring better than their index peers in 2020.
Dimitar Boyadzhiev, senior analyst for passive strategies research at Morningstar Europe, said the coronavirus sell-off last year and subsequent market volatility “tested the narrative that active funds are generally better able to navigate market volatility than their index peers”.
“As we documented in our midyear 2020 report, active funds’ performance through the first half of the year showed that there’s little merit to this notion,” he added.
“The full-year result for active funds told the same story.”
There were some exceptions, with equity funds focused on Austria, China, Russia and Norway among those that comfortably beat comparable passive products.
And active fund managers have at least taken comfort from the record flow of money into product ranges which have an environmental, social and governance tilt.
Assets in ESG funds hit a record €1.1tn at the end of 2020, according to Morningstar, fuelled in part by investors ploughing more money into sustainable funds in the wake of the pandemic. ESG funds overseen by stock pickers have been among the main beneficiaries.
Laith Khalaf, a financial analyst at AJ Bell, said the chance of outperformance over the course of just one year “is a coin toss”.
“Conventional wisdom dictates that active managers should outperform in a downturn, but that really depends on the particular market under analysis,” he said.
“It also depends on the nature of the market sell off, because the tailwind for active management in this scenario is the reversal of investment trends, where the shares that have done best fall furthest, hitting passives to a greater extent than active funds because the former simply load up on the biggest stocks in the market.”
Khalaf said he was more concerned with longer term figures, which show active fund have failed to outperform passives over the past 10 years.
Morningstar research showed that over the past decade to the end of December 2020, less than 25% of active managers across nearly two thirds of the investment categories it looked at did better than their comparable passive peers.
“Part of the problem is the vast preponderance of closet trackers out there, which charge active fees but deliver passive performance, and hence deliver worse results than a competitively priced, simple, tracker fund,” said Khalaf, referring to funds that charge a fee for being actively managed but do little more than track their benchmark.
“We shouldn’t conclude from the scarcity of good active management that it doesn’t exist. There are a number of managers out there who have delivered exceptional performance over a long enough time frame to be confident they are skilful, not just lucky.”
It is not just European domiciled funds that failed to deliver last year. Those in the US fared even worse.
Morningstar found just 49% of the nearly 3,500 active funds it analysed survived and outperformed their average passive counterpart over the 12 months to the end of 2020.
Jason Hollands, managing director at Tilney, said 2020 was a year of two halves.
“In the first half, which included the coronavirus crash, you’d expect active funds to have fared better than most index funds,” he said.
“From late March, risk assets rallied significantly on the back of a wall of central bank liquidity. but it was also a period of extreme disparities between value and growth stocks, with the surge in equity markets globally led by a narrow band of technology and online stocks.
“If you were invested in an S&P 500 Index fund, or global index fund, you would have been fully exposed to this. If you were an active manager, not fully invest or having and income or value mandate, you struggled to keep pace.”
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