Some 30 per cent of active funds beat their passive counterparts in the six months to June, down from 34 per cent in the same period last year, according to AJ Bell’s latest manager versus machine report.
This year is not shaping up to be a good year for active fund managers, said head of investment analysts at AJ Bell, Laith Khalaf.
“[The low outperformance by active managers] is despite choppy market conditions which one would normally expect to favour the flexibility of active funds over the rigid investment strategy of index trackers”, he added.
IA Sector | H1 2022 | 5 years | 10 years | 2021 |
UK All Companies | 12% | 31% | 63% | 41% |
Asia Pacific Ex Japan | 27% | 47% | 59% | 26% |
Europe Ex UK | 49% | 46% | 57% | 53% |
Japan | 40% | 43% | 51% | 47% |
Global Emerging Markets | 21% | 37% | 42% | 50% |
North America | 40% | 25% | 28% | 19% |
Global | 31% | 26% | 28% | 25% |
Total | 30% | 33% | 45% | 34% |
The worst geographical sector was the UK, with 12 per cent of active funds outperforming their passive counterparts, followed by global emerging markets, with 21 per cent of funds outperforming.
Khalaf pointed to the “achilles heel” of UK fund managers who have exposure to mid and small caps, which have suffered in the rotation away from growth stocks.
The FTSE 100 has lost 1 per cent in total return, AJ Bell said, compared with the average active fund falling 13.5 per cent.
A large chunk of active funds have outperformed an index tracker over the last decade, which gives active fund investors some cause for optimismLaith Khalaf, AJ Bell“The propensity of active fund managers to be underweight large caps and overweight mid and small caps therefore means that many UK fund investors haven’t benefited from the relatively strong performance of the FTSE 100 in 2022,” Khalaf said.
At the other end of the chart, 49 per cent of active European funds (excluding the UK) outperformed their passive counterparts, with 40 per cent of Japan and North America funds doing the same.
The sell-off in large tech firms this year should have allowed active managers to “play catch up” on their rivals, Khalaf said, who buy into the biggest companies in the market regardless of what they are.
However, the average exposure of US active funds to tech stocks was 25.4 per cent, insignificantly lower than passives which had 25.9 per cent.
“Nonetheless that means just under half of active funds were underweight technology stocks, and combined with the scale of poor performance from the tech sector, that has helped to lift the number of active funds outperforming, from a pretty low base,” Khalaf said.
Long-term performance
When looking at performance over 10 years, the outperformance by active funds rises significantly.
UK all companies funds are those with the highest percentage of active managers outperforming passives, with 63 per cent.
This is followed by Asia Pacific (excluding Japan), with 59 per cent.
North American and global funds fared the worst over a 10 year period, with just 28 per cent of active funds outperforming their passive alternatives.
Khalaf highlighted the "survivorship bias" that impacts the 10-year performance of the sector, as unsuccessful funds look to merge or wind down.
"Nonetheless that does still mean a large chunk of active funds have outperformed an index tracker over the last decade, which gives active fund investors some cause for optimism," he said.
"So does the fact that the success of active managers is not uniform across fund sectors, which furnishes investors with the opportunity to pick and choose which parts of their portfolio they populate with active and passive strategies.”
AJ Bell's last report showed that just a third of active equity funds beat a passive alternative last year, with active Global and North America sectors lagging particularly behind.
sally.hickey@ft.com
