Stockpickers show signs of turnround after lagging behind markets
More than half of active managers focused on UK and Europe outperformed last year
Just over half of the actively managed funds focused on UK and pan-European equities beat their benchmarks last year in a marked improvement in performance after a dismal showing by stockpickers in 2016.
The turnround will provide some encouragement to defenders of active management who believe that the gradual withdrawal of support measures for financial markets by central banks will lead to more volatile trading conditions and stronger demand for skilled stockpickers.
Arthur Grigoryants, head of investment strategy at RWC Partners, the London-based asset manager, said quantitative easing by central banks had produced a massive tidal effect of liquidity that had lifted all assets.
“Passive investment has seemed like a no-brainer in this environment. If the reversal in liquidity is accompanied by less noise around macro issues such as Brexit or the threat of a trade war, then there should be a renewed focus on individual company fundamentals, which should help active managers,” said Mr Grigoryants.
The annual S&P Dow Jones Indices Versus Active, or Spiva, report published on Monday, showed that nearly 54 per cent of actively managed UK equity funds outperformed the benchmark in 2017, up from just 22 per cent the previous year.
Actively managed UK equity funds on average returned 15.1 per cent net of fees last year, just over 2 percentage points higher than the 13 per cent returned by the UK equity index calculated by S&P.
Many retail investors, however, will have missed out on the improvement having pulled out last year following the poor performance of actively managed UK equity funds in 2016. About £2.8bn was withdrawn from UK equity funds in 2017 by retail investors, according to the Investment Association, the trade body.
Actively managed pan-European funds that can invest in UK stocks also posted a substantial improvement in performance in 2017. S&P’s data showed that almost 54 per cent of these funds registered outperformance last year, compared with fewer than a quarter in 2016.
The improvement in performance last year among UK and pan-European equity funds was not mirrored by US-based managers that use the S&P 500 index as their benchmark. The S&P 500 posted a total return, including dividends, of 21.8 per cent in 2017 — a high hurdle to clear. Just over 63 per cent of US large-cap managers failed to beat the S&P 500 last year, compared with 66 per cent in 2016.
Stockpickers focused on individual country markets in Europe registered mixed performance in 2017. Fewer than half the actively managed funds in France, Holland, Spain or Switzerland beat their national benchmarks last year, while there were stronger performances by country funds in Germany and Italy, where 60.7 per cent and 71.7 per cent respectively delivered outperformance.
But finding active managers that can deliver consistency remains akin to finding a needle in a haystack because the number of funds that beat their benchmark shrinks significantly over three, five and 10 years across all sectors. Only one in four UK actively managed equity funds has delivered outperformance over the past decade.
In nine of the 23 European fund categories, S&P identified above-benchmark asset-weighted returns over 10 years. But fewer than a third of the funds in those nine categories beat the benchmark over a decade.
“A minority of funds were responsible for success in each group,” said Leonardo Cabrer, senior analyst at S&P.