Active funds have the edge on passives in week of turmoil
Index funds suffer from higher exposure to the energy sector
Active managers in the UK are outperforming passive equity funds in the market sell-off, boosting longstanding claims that the former prove their mettle at times of volatility.
“For active managers it is showtime,” said Anthony Morrow, chief executive of OpenMoney, a financial advice service. “For many years they claimed . . . that they would be judged by what happens in a downturn, sharp or not.”
Since February 20, four out of five UK mutual funds invested in US equities outperformed the market, while 89 per cent of active UK funds outperformed. In European equities, 91 per cent of active funds beat market declines, according to analysis from fund research firm FE Fund Info.
“Active managers did a very good job in protecting from the downside, as they avoided the most cyclical part of the markets such as energy and banks,” said Charles Younes, research manager of FE Fund Info. However, he added that active managers in Japanese and emerging markets had suffered.
Passive funds in the UK gilt market performed on par with active gilt funds over the same period, according to the data, closing the performance gap between active and passive over the year. Until the recent sell-off, only one active fund had managed to beat the benchmark.
But actives did not outdo passives across the board. Actively managed strategic bond funds, which were down 2.9 percentage points on average, outperformed investment grade passive bond funds, which fell 3.1 per cent, but fell short of the global bond market, which remained flat.
Active bond funds could have performed better had they taken quick action to move into government bonds. Mr Younes said: “You could have expected them to return more, something in line with the total bond market.”
Active managers insist they prove their worth at times of market turmoil. “It would be glib to say our active managers are rubbing their hands together with glee,” said Chris Ralph, chief global strategist at wealth manager St James’s Place, noting that drops in equity prices allow managers to pick up attractive companies for a discount.
Mr Ralph said St James’s Place, which invests client money in its own funds, had been “outperforming the index benchmarks we have set”.
Some fund managers cautioned against declaring victory for active over passive. “Our experience is that over longer term periods you tend to find that most active managers underperform the passive options once fees have been taken into account,” said Iain Barnes, head of portfolio management at wealth manager NetWealth.
New data show that investors pulled more than £377m out of UK active equity funds in the first nine days of March, with £239m in outflows occurring on Monday. More than £318m was moved into passive funds, which have seen inflows every day since the beginning of March, according to data from Calastone, a funds transaction network.
Edward Glyn, head of global markets at Calastone, said: “With markets showing such extreme volatility, trying to time entry points is a very risky strategy. Those that bought last week may already be nursing burnt fingers after the market continued to decline.”
Index trackers were hard hit in the past week because of exposure to oil and gas, which have tumbled as a result of the oil price war that erupted over the weekend.
But the 48 per cent slide in oil and gas capital returns has benefited those who chose to invest in ethical or green funds, said Jason Hollands, managing director at Tilney Investment Management. He said: “Funds with exposure to mid-caps and ESG funds have done well for not having energy or commodity exposure.”
On Thursday, the FTSE 100 saw its second biggest sell-off on record, and the S&P closed 6 per cent down, though markets recovered some of their losses in early trading on Friday. US Treasury bond yields rose this week as the market slid, and gold futures also fell. Analysts say the market has now entered bear territory after a record bull run.
Investors received formal notification from their discretionary wealth managers on Wednesday warning them that their portfolios had lost more than 10 per cent of their value in the first quarter, a requirement under Mifid II regulatory reforms.
“The requirement to tell clients within 24 hours that a significant loss has occurred encourages short-term thinking, and risks people making changes to their portfolio at what is almost certainly the worst possible time to do so,” said Mr Morrow, who noted an increase in appointments with advisers since the sell-off began.
“The bigger concern is what do customers receiving these who have no adviser do and who do they turn to?” said Mr Morrow, who cautioned that letters to customers of non-advisory platforms risk increasing investor panic and fuelling a sell-off. “Encouraging instant reactions to market volatility is dangerous and risks exactly the sort of poor outcomes that the regulator is normally working to avoid.”
Discretionary managers say it is more important than ever to communicate with clients to prepare them to receive such letters, which will go out again if a portfolio loses an additional 10 per cent, and explain what the losses mean given their target risk exposure.
Advisers insisted that regardless of active or passive management, the best investment strategy in a crisis is a long-term one. Vanguard, which holds about $1.3tn or 25 per cent of its assets under management in active funds, reported a doubling in the number of US clients making trades on the platform. At 3.8 per cent of clients, however, the level is still relatively low.
“Many Vanguard investors have seen the global financial crisis, they’ve seen the tech bubble, they know to stay the course,” said Jean Young, Vanguard senior research associate.
Pointing to a study of investment activity among those holding US retirement plans in the years following the financial crisis, she said: “The most frequent traders actually had lower returns than people who didn’t trade at all.”
