Active managers take a beating

Mar 20th, 2018 | By | Category: Equities

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Active equity managers in Europe have taken a beating in the past decade, overwhelmingly failing to outperform their benchmark indices over the last ten years, according to the latest S&P Indices Versus Active (SPIVA) Scorecard.

Active managers struggling to beat their benchmarks, finds S&P DJI

Over 98% of actively managed global equity funds (EUR) have been beaten by their benchmarks over the past ten years.

The results support the ongoing argument that passive funds, such as index-tracking ETFs, pack a better punch than their actively managed counterparts.

The SPIVA scorecard, which is considered the de facto scorekeeper of the ongoing active vs. passive debate, analyses the performance of actively managed funds against their relevant S&P benchmark index.

The most recent scorecard looks at fund performance up to 31 December 2017.

Of euro-denominated funds, the scorecard found that a shocking 98.9% of actively managed global equity funds failed to beat the benchmark S&P Global 1200 Index over a ten-year period.

Nineteen out of 20 of these funds, or 94.5%, underperformed the benchmark over a five-year period. Looking at a shorter horizon, investors had a less than 50/50 chance of selecting an outperforming active fund in 2017 as 53.8% underperformed.

The situation was similarly dismal for actively managed US equity funds with 97.8% underperforming the S&P 500 Index over ten years, 95.9% underperforming over five years, and 71.2% unable to beat the bellwether blue-chip index in 2017.

Active managers of European equity funds (benchmarked to the S&P Europe 350 Index) and sterling-denominated UK equity funds (benchmarked to the S&P United Kingdom BMI) fared better over the past year compared to historic trends, with fewer than half (46.6% and 46.4% respectively) underperforming their benchmarks in 2017.

Over a longer time period, however, the situation looks increasingly dire. The percentage of underperforming active European equity funds rises to 73.3% for the five-year period, while less than 15% outperformed over the full ten years. Just over half (54.1%) of actively managed UK equity funds underperformed over the five-year period with the figure rising to 75.2% for ten years.

With grim performance like this, it is no wonder that index-tracking ETFs, offering pound for pound better value, have taken assets from traditional active managers and grown to an almost five-trillion-dollar industry.

So why do active managers consistently underperform? In short, because of management fees and tradings costs. Active funds typically charge much higher fees and their managers turn over their portfolios more often, incurring both explicit and implicit transaction costs. The net effect of these two drags, not to mention the impact of flawed investment decisions, is underperformance. Compound this difference over a long investment horizon and the odds of picking a winning fund are minimal.

With MiFID II shining a very bright light on fund costs, it is increasingly likely therefore that more investors will throw in the towel with active management and turn to passive funds such as ETFs.

Source: S&P Dow Jones Indices.

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