Nearly half of active funds in the UK failed to outperform their benchmark during the first six months of 2020, according to research by Trustnet, calling into question longstanding claims that stockpickers shine in times of market volatility.
Considering the perceived underperformance of active managers and inflows toward passive vehicles, Trustnet decided to analyse the average performance of both active and passive funds across the Investment Association (IA) sectors.
Indeed, the research shows that the average active fund has outpaced its average passive rival across a selection of key sectors. It was only the IA Global Emerging Markets sector where the average passive strategy outperformed its active peer.
Of course, some active strategies have had extremely difficult years and some passive funds have underperformed simply by virtue of tracking an index which has been more exposed to fallout from the Covid-19 crisis.
Using data from FE Analytics, the year-to-date average return of the sector as a whole is broken down into passive and active sub-sectors. This automatically discounted sectors like IA Global Equity Income and IA Flexible Investment, which have no passive strategies.
The difference between the two different approaches was examined to find out which sector was most influenced by the active/passive disparity.
In a year where commentators generally believed active managers had underperformed in a volatile market, research by Trustnet showed that on average investors would have been better off with active funds in 2020.
Percentage difference between performance of average active vs active passive across sectors
Source: FE Analytics
It’s unsurprising to see the IA Technology & Telecommunications sector at the top of the list in terms of total return. Lockdown conditions and working from home during the pandemic has increased people’s reliance on technology this year, both from a business standpoint and keeping people entertained.
With an average total return of 31.5 per cent for the sector as a whole, it is the active funds that have outpaced passives, making 41.6 per cent against a 21.5 per cent return for the trackers, equating to the highest difference in the list of 20.1 per cent.
However, it must be said that there are only two passive funds within the 16-strong sector which have had differing levels of success over the year.
The £943m L&G Global Technology Index Trust has made a total return of 38.15 per cent year-to-date, while the Close FTSE techMark fund – which tracks the small- and mid-cap FTSE techMark Focus index has returned 4.82 per cent.
Out of the 14 active funds in the IA Technology sector, the strongest performer was the £1.2bn T. Rowe Price Global Technology Equity fund, which has made a total return of 63.75 per cent year-to-date.
The IA Asia Pacific ex Japan sector is also worth noting with a high total average return of 13.8 per cent. The average passive strategy returned 9.3 per cent, while the average active fund returned 18.3 per cent.
The index funds with lower returns relative to their peers are a result of the benchmark they track. The MSCI Pacific ex Japan index – tracked by three strategies – has made a total return of 4.69 per cent, whereas the MSCI AC Asia Pacific ex Japan benchmark has made 18.60 per cent.
Performance of MSCI Pacific ex Japan vs MSCI AC Asia Pacific YTD
Source: FE Analytics
On the active side, the £2.2bn Baillie Gifford Pacific fund is at the top of performers, with a total return of 54.12 per cent, while the BNY Mellon Oriental fund made 48.78 per cent year-to-date.
However, two active strategies lost money in this sector: the Janus Henderson Asian Dividend Income Unit Trust recorded a loss of 4.12 per cent, while the L&G Asian Income Trust made a loss of 5.27 per cent over the same period.
A total average return of 11.8 per cent for the average IA Global sector fund comprises of a 13.1 per cent return for the average active fund and 10.4 per cent for the average passive fund.
The only passive fund to lose money was the L&G Global Infrastructure Index fund, which tracks the FTSE Global Core Infrastructure index, and is down by 2.68 per cent this year.
Another Baillie Gifford strategy was at the top of active performers, the Baillie Gifford Long Term Global Growth Investment made a total return of 88.16 per cent.
At the other end of the active fund performance were two energy funds, Schroder ISF Global Energy and Guinness Global Energy which lost 35.79 per cent and 36.79 per cent respectively.
Largest funds in the IA UK All Companies sector
Source: FE Analytics
Considering that the IA UK All Companies sector has 36 passive funds compared to 205 active strategies, five of the top-10 largest funds in terms of AUM (assets under management) are passive vehicles - with a '1' denoting passive and '0' representing active.
But with the UK equity market continuing to struggle against a backdrop of Brexit uncertainty and the fallout from the Covid-19 pandemic, all passive strategies were in negative territory.
Indeed, it was exclusively active funds that made positive returns year-to-date, with the Baillie Gifford UK Equity Focus fund making 11.39 per cent and MI Chelverton UK Equity Growth up 10.38 per cent.
But not all active funds prospered with the value-focused Jupiter UK Growth fund posting a loss of 26.47 per cent over the same time period.