Figures from the Investment Association show active funds attracted £5.2bn of net inflows in December 2020 — more than five times the £930m invested into passive funds, making it the second highest month for active inflows on record.
Investors pumped a total of £12.4bn into active funds throughout 2020, turning a corner from their experience in 2019, when the funds saw £8.1bn of outflows.
Experts put the step change down to the volatility of markets and the poor performance of certain sectors, which brought down the overall performance of the indices passive funds track.
Adrian Lowcock, head of personal investing, said: “Passive funds tend to struggle more during volatile markets and especially where there is rotation in stocks.
“The pandemic and subsequent market volatility has meant some companies have benefited from the crisis, whilst others have suffered significantly. Active managers can jump on opportunities and adjust their portfolios to reflect not only the events that have happened but also to be positioned for the future.”
Ben Yearsley, director at Fairview Investing, agreed, adding that active outperformed in 2020 as some of the big constituent sectors, such as oil and financials, had “dreadful performance”.
For Alistair Fullerton, director at Lathe and Co, it was the strong performance coupled with the human management which had attracted investors to active portfolios.
He said: “We have seen the critics of active management quieten somewhat since Covid – I think in volatile times the thought of human ability to step in gives people a lot of comfort.
“On top of this, active funds have performed well during this period and so have proved their worth.”
Others thought the flows into actively managed portfolios were driven by investors rotating into value stocks that might benefit from a rerating in cyclical sectors.
Jason Hollands, managing director at Tilney, said: “My hunch is that as indices have rebounded, in many cases to record highs, investors have increasingly been rotating into recovery and value strategies [...] most of which will be actively managed.
“There is a growing sense that parts of the market – notably US tech – are exhibiting bubble-like characteristics, so it is reasonable to expect that some investors have been tilting away from index funds.”
Turning the tide
The outperformance in 2020 marked a turning point for active managers, which in general have struggled to beat their tracker counterparts over the last five years.
Last year, research from Albemarle Street Partners showed just 40 per cent of active funds had returned more than passive equivalents since 2015.
Money has been flowing from active to passive strategies since 2018 as active funds’ underperformance coupled with Mifid rules, which highlighted the extra cost of active management, encouraged investors to change tack.
Mr Lowcock thought active funds were “well placed” to continue to do well over the next few years.
He said: “There are clear developments which mean we will continue to see a lot of change and those businesses that embrace the technology are likely to benefit.
"At the same time there are plenty of companies which will recover from the crisis and be well positioned to gain market share through that recovery. Active managers can take advantage of both opportunities.”
Others were not so certain. Alistair Cunningham, financial planning director at Wingate Financial Planning, said: “I find these short-term trends difficult to make any judgement.
“I find the long-term move to passive funds understandable, but can still see merit in active funds for some investors, and some sectors.”
In fact, Mr Yearsley thought the opposite could be the case for 2021, predicting markets could see the reverse this year as “the oil price recovers and life returns to some sort of normality”.
imogen.tew@ft.com
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