Active equity funds underperform benchmarks in Europe, reports S&P

Mar 21st, 2016 | By | Category: Equities

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More than 85% of active equity funds in Europe underperformed their benchmark over the last ten years, according to the Year End 2015 Europe S&P Indices Versus Active Funds (SPIVA) Scorecard.  The results support the ongoing argument that passive funds, such as ETFs, offer better value and performance than their actively managed counterparts.

Active equity funds underperform passive benchmarks in Europe, finds S&P Dow Jones

Over 85% of active European equity funds linked to the S&P 350 Europe Index were unable to beat their benchmark over a 10 year period.

The SPIVA scorecard, which is considered the de facto scorekeeper of the ongoing active versus passive debate, includes a breakdown of the performance of actively managed funds in a wide number of specific European countries, against their relevant S&P benchmarks.

It specifically measures the performance of actively managed European equity funds denominated in euro (EUR), British pound sterling (GBP), and other European local currencies against the performance of their respective benchmark indices over 1-, 3-, 5-, and 10- year investment horizons.

Highlights from the report show that, compared to the S&P Europe 350 Index – a reference for 350 blue-chip countries listed across 16 developed European countries – underperformance of actively managed European equity funds increased sharply after just one year, rising from 31.9% in year one, to 63.8% by end year three, 80.6% in year five, to 86.3% after ten years. (See diagram below)

Active equity funds underperform passive benchmarks in Europe, finds S&P Dow Jones

(Source: Standard & Poor’s)

The paper also investigated the performance vs. benchmark differences for active funds invested in specific European markets – UK, France, Germany, Switzerland, Italy, Spain, Netherlands, Denmark, Sweden and Poland.  These findings showed underperformance over one year of active equity funds compared to their respective index ranged from 19.6% (Poland) to 69.7% (Denmark); underperformance increased sharply over three years, ranging from 33.8% (UK) to 93.3% (Netherlands); over five years, underperformance continued to increase, ranging from 51.6% (Italy) to 100% (Netherlands); and by ten years, more than two-thirds of active funds had underperformed their benchmarks, ranging from 71.8% (UK) to 96.8% (Netherlands). (See diagram below)

Active equity funds underperform passive benchmarks in Europe, finds S&P Dow Jones

(Source: Standard & Poor’s)

Interestingly, while the results reflect poorly on European active equity funds, underperformance was even higher in actively managed global, emerging market and US equity funds. While 73.6% of active global equity funds underperformed the S&P Global 1200 Index in 2015, despite active management opportunities in volatile markets, the figure increases to 97.8% over a ten-year period. Similarly, 74.9% of emerging market active funds underperformed the S&P/IFCI Index last year, rising to 97.0% over ten years; and 83.9% of actively managed US equity funds underperformed the S&P 500 Index in 2015, with 98.9% underperforming over ten years.

The ability of passive trackers such as ETFs to provide low cost access to benchmark returns, combined with the inability of most active managers to provide superior returns, has contributed greatly to the rise in popularity of index funds, at the expense of the active management industry. Consequently, many active managers have resorted to slashing fees in a bid to retain client’s business. The Washington-based Investment Company Institute recently reported that average expense ratios for equity, hybrid, and bond mutual funds are at their lowest levels in over 20 years.

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