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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.