Active fund selection 'no better than a coin toss'

Active fund selection 'no better than a coin toss'

The ability of active fund managers to beat their passive equivalents improved notably in 2017, but the likelihood of it happening is still akin to flipping a coin, according to the latest data from research firm Scope Analysis.

The research examined 3,000 UCITS funds, and found that last year just 53 per cent of the 2,100 equity funds looked at beat their benchmark.

However this was a notable improvement on the 23 per cent of funds that beat the benchmark in 2016.

The researchers said: “With a ratio of just over 50 per cent, the probability of choosing an active fund which will exceed the benchmark is only marginally higher than tossing a coin. In order words: too many funds failed to beat their benchmark in 2017.”

Active funds investing in the German market were most likely to beat the index, with over 80 per cent ahead of the benchmark, while only a third of actively managed funds in the IA North America sector beat their benchmark in 2017.

David Absolon, investment director at wealth manager Heartwood, said he doesn’t use actively managed US funds because “there are not really any that consistently beat the benchmark". 

Turning to bonds, the research found 50 per cent of actively managed bond funds beat the market in 2017, as compared to 33 per cent in 2016.

The research found a greater proportion of actively managed funds beat the sector average in 2017 than 2016 in 16 out of the 17 sectors examined across the bond and equity universe.

The researchers said: “Even though the outperformance ratio of many of the active peer groups in the Scope study significantly increased relative to 2016, the extent to which they beat their benchmarks in 2017 could be better."