According to AJ Bell’s latest ‘Manager vs Machine’ report, some 25 per cent of active equity funds in the Global sector outperformed passive alternatives, with just 19 per cent of North America equity funds seeing better returns.
The sectors are two of the most popular ones for investment, and currently account for £270bn of investors’ money, according to AJ Bell.
Over a five-year period, just over half (51 per cent) of active funds beat their passive alternatives.
Percentage of active funds outperforming passives
IA sector | 2021 YTD | 5 year | 10 year |
Asia Pacific Ex Japan | 26% | 44% | 63% |
Europe Ex UK | 53% | 46% | 64% |
Global | 25% | 40% | 30% |
Global Emerging Markets | 50% | 63% | 72% |
Japan | 47% | 61% | 64% |
North America | 19% | 32% | 22% |
UK | 41% | 71% | 85% |
TOTAL | 34% | 51% | 56% |
Sources: AJ Bell, Morningstar, total return in GBP to 01/12/2021
Laith Khalaf, head of investment analysis at AJ Bell, said active managers in the sectors may be struggling due to the number of “analytical eyes” pouring over the US stock market.
“The continued market domination by a small number of large tech stocks may also be feeding into the equation, reinforcing the implicit passive principle that big is beautiful, and punishing those who take a dissenting view with their portfolios,” he said.
“This issue has increasingly affected the Global sector too, seeing as the US stock market has grown to such an extent that it now makes up around two thirds of the world index.
“Global tracker funds therefore increasingly resemble US tracker funds, making it more difficult for active funds to compete in this arena while the US maintains its ascendancy.”
Khalaf warned a reversal in fortunes for the US stock market could have consequences for the performance of Global passive equity funds.
“If the raging US bull market comes a cropper though, this performance differential could get turned on its head, seeing as the average global active fund is around 8 per cent underweight the US compared to passive peers,” he said.
While the long-term performance of the Global and North America sectors doesn’t look good for active investors, he said it was worth remembering that market performance in the last ten years has been heavily influenced by ultra-loose monetary policy and the digitalisation of the global economy.
"Should one, or both, of those trends moderate or even go into reverse, life might not prove so breezy for the passive machines that simply invest money according to the size of companies in the market."
Comparing charges
UK active funds are offered at a lower price than most regions, and have a smaller premium over passive alternatives too, according to AJ Bell.
Average charges active vs passive
IA sector | Average ongoing charges | ||
Active | Passive | Active premium | |
Asia Pacific Ex Japan | 0.95% | 0.15% | 0.80% |
Europe Ex UK | 0.89% | 0.12% | 0.77% |
Global | 0.92% | 0.2% | 0.72% |
Global Emerging Markets | 1.01% | 0.25% | 0.76% |
Japan | 0.9% | 0.13% | 0.77% |
North America | 0.86% | 0.1% | 0.76% |
UK All Companies | 0.86% | 0.17% | 0.69% |
Sources: AJ Bell, Morningstar
“Charges on the most competitively price tracker funds have come down significantly in the last ten years, and so discriminating passive investors can expect to improve their lot by shopping around,” Khalaf said.
He added active fund charges have also become more competitive since the Retail Distribution Review increased transparency in the market.
“Active funds are less commoditised than passive funds though, with managers competing not just on charges, but also on performance and volatility.
“Active investors may legitimately therefore choose to pay a price premium for a fund manager they have a high level of conviction in.
“Such considerations don’t carry much weight in tracker land, where index selection and price are the key components of investment decisions.”
sally.hickey@ft.com
