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Brexit and Trump heap pressure on active managers

Brexit and Trump heap pressure on active managers

by Michelle McGagh Apr 05, 2017 at 12:46

Three-quarters of UK funds have underperformed over a 10-year period, according to the latest S&P Index Versus Active (Spiva) scorecard, which pits active management against index-tracking funds.

The scorecard, published by S&P Dow Jones Indicie, has been charting the performance of active funds against relevant S&P indices for 15 years and calls itself the ‘scorekeeper of the active versus passive debate’.

Its latest publication provides a bleak view of UK funds over all timeframes. A total of 75.6%  of UK equity funds underperformed the S&P United Kingdom BMI index, which includes all UK domiciled stocks from the S&P Europe 350 index, over a decade.

Over five years, half of funds underperformed the index, growing to 61.6% over three years. Over a one-year timeframe the picture was particularly dismal as 87.2% of funds underperformed, reversing a solid year for active managers in 2015, when just 22.1% underperformed.

Last year saw a turning of the tables in UK stock markets, with many of the top-performing fund managers of recent years falling to the bottom of their sectors.

The Brexit vote brought the outperformance of UK mid-caps to a shuddering halt, while those who had escaped the commodities carnage between 2011 and 2015 by avoiding the likes of mining stocks found themselves on the back foot last year as the sector rebounded strongly. Donald Trump's shock election as US president meanwhile drove a rally in cyclical stocks that caught some investors off guard.

Drilling down further into the Spiva data shows UK large- and mid-cap equity funds did particularly poorly, with 92.5% underperforming the S&P United Kingdom LargeMidCap index over one year and 77% underperforming over a decade.

Small-cap funds fared better, with just 36.9% underperforming the S&P United Kingdom SmallCap benchmark over one year but performance was just as poor as large caps over a 10-year timeframe, with 76% underperforming.

Just 14% of large cap funds underperformed in 2015 while 49.2% of small cap funds failed to beat the index that year.

Daniel Ung, director of global research at S&P, said the underperformance seen in UK managers was widespread across Europe and beyond.

‘European equity markets, as measured by the S&P Europe 350, went up 3.4% in 2016, yet the average performance of active managers invested in Europe was negative,’ he said.

‘Over the one-year period, more than 80% of active managers invested in European equities underperformed their respective…benchmark.’

Of managers invested in global markets, Ung said 88% underperformed their respective benchmarks over a one-year period, and 98% failed to beat their index over a 10-year period.

The only exceptions to the underperformance seen across the globe was that ‘nearly all active managers invested in Denmark and Switzerland bear the corresponding… benchmark over the one-year period’, said Ung, although the majority did not beat their index over the longer term.

The report clearly shows an increasing divide between active and passive funds.

Ung said there was ‘a widely held belief that active portfolio management can be most effective in less efficient markets, such as emerging market equities, because these markets can provide managers the opportunity to exploit perceived mispricing’.

However, he said the view was not backed up by the Spiva scorecard ‘as over 90% of active funds underperformed their benchmarks over all time horizons’.

S&P Dow Jones' research was into the performance of open-ended funds. Its findings contrast with research from Fund Consultants into the performance of investment trusts, which found they delivered net asset value performance ahead of exchange-traded funds in nine out of 10 sectors.

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Comments  (6)

  • Law Man: 

    No surprise here. The appropriate response is:

    1. Hold index tracker S&P500 ETF for mainstream US equities (also I hold a DAX30 ETF). Use an ETF index tracker for short duration bonds, where the higher AMC of a managed fund wipes out a big part of the thin interest rate.

    2. Buy 'superior' ITs for other markets and specialist areas.

    3. Diversify.

    16:26 on 05 April 2017

  • Jpb250: 

    Thanks Law Man. What do you suggest for an ETF index tracker for short duration bonds?

    16:39 on 05 April 2017

  • Law Man: 

    Jpb250: IS15 being the I-Shares 0-5 years Investment Grade corporate bond tracker.

    It costs only 0.2% p.a. and yields 2.36% p.a. after charges, which covers inflation.

    I hold it as the very end of my low risk allocation (apart from cash).

    Being investment grade, there is little default risk.

    You will see it is not volatile as the average maturity date is about 3 years, so there is little interest rate risk.

    The sudden drops in price every March and September reflect it going exc div.

    17:25 on 05 April 2017

  • Stephen B.: 

    That's interesting, although in the details I see that the weighted yield to maturity is 1.47%, i.e. there's an inbuilt capital loss which offsets part of the dividend yield. There would also be dealing costs which would reduce returns a bit more. Still in a situation where ISAs and SIPPs often pay nothing on cash it may be a useful place to retreat to.

    11:55 on 09 April 2017

  • Law Man: 

    Stephen: a fair comment but:

    1. The underlying bonds are renewing - more bought in as others mature. Thus it is not a run down to a fixed maturity date.

    2. At any time you can sell the ETF holding for the current market price. The current bid/ offer spread is 0.23%.

    3. Dealing costs: you will pay a broker's charge on purchase: say £11-95. There is no stamp duty on an ETF.

    14:59 on 09 April 2017

  • Stephen B.: 

    But the individual bonds will generally mature at a lower value than their current market price, so the NAV is reducing (slowly) over time.

    The impact of spreads and charges will depend on how much you buy and how long you hold them for, so they aren't a good substitute for short-term cash holdings.

    15:14 on 09 April 2017

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