Outperformance by top active funds revealed

Outperformance by top active funds revealed

The average active fund has outperformed the average passive fund over 20 years in three out of five global sectors, according to new analysis. 

BMO Global Asset Management’s multi-manager team reviewed the performance of all active and passive funds across the Lipper sectors UK, Europe, Asia, US and Japan over a 20-year period. 

The research found the average active fund outperformed its passive equivalent in the UK, Europe, and Japan. 

The scale of the outperformance of the best performing active fund versus the best performing passive fund was also notable in the PassiveWatch findings. 

In the US for example, the best performing active fund outperformed the average passive fund by a multiple of 6.3. In the UK it was 5.9 times and in Asia it was 2.9 times.

The PassiveWatch report also revealed a big performance range between the best and worst performing passive funds.

For example, over the year ending December 31, 2018, the best and worst passive funds in the Lipper Global Equity US sector ranged from returns of +9.8 per cent to -11.1 per cent. 

The sector with the highest difference was the Equity Emerging Markets Global, which saw a difference of 24.7 percentage points between the best and worst performing funds.

The lowest difference in returns was seen in the Equity Europe sector, which saw 2.6 percentage points between the top and bottom funds.

Rob Burdett, co-head of BMO Asset Management’s multi-manager team, said: "This research highlights that there is alpha to be found in active, but also reinforces the importance of due diligence to identify the best active managers which can outperform passives significantly over the long-term.

"Choosing the right managers and exposures in passive is also imperative, and passives can play an important role in reducing overall cost and adding diversification. Over any sensible investing period both active and passive can play a role at different times for different markets."

The global Emerging Markets and Sterling Corporate Bond sectors were excluded from the analysis as there were no passive funds on offer in these two sectors 20 years ago.

The passive sector has seen significant growth in numbers over the past 20 years. According to BMO, in 1998 there were a total of 47 passive funds across the seven Lipper sectors the multi-manager team reviewed. By the end of 2018 that figure had increased to 431. 

The Lipper sector with the highest proportion of passive funds is Japanese Equities, with 67 out of 204 funds passively managed.

Scott Gallacher, chartered financial planner at Rowley Turton, said: "Opinions on active versus passive tend to be polarised, but despite many years of claim and counterclaim, and various academic studies, neither side has ever managed to land a knock-out blow proving its case.  

"One particularly interesting thing from the ‘PassiveWatch’ research is the variation in returns from different passive funds within the same sector. This shows that even passive investment requires an element of active oversight, i.e. what do you track and how do you track."