There was a sharp deterioration in the performance of UK active equity funds in 2018 as just over a quarter of funds managed to outperform a comparable benchmark, according to data from S&P Dow Jones Indices.
The biannual S&P Indices Versus Active Funds (SPIVA) Europe Scorecard found that active fund outperformance fell across the board last year.
It was a challenging year for markets as a number of macroeconomic themes played out, increasing volatility and making it more difficult for some active managers to outperform.
“A high proportion of active funds in Europe underperformed their benchmarks in 2018; this coincided with substantial drawdowns in global and European equity markets toward the end of the year,” said Andrew Innes, associate director at S&P Dow Jones Indices.
“Markets became increasingly concerned throughout the year – global trade tensions, weakening economic growth in China, and eurozone and Brexit uncertainty were all contributing factors.”
Last year both the average IA UK All Companies and IA UK Equity Income fund posted double-digit losses and failed to outperform the FTSE All Share – a commonly used benchmark for the sectors – which fell 9.47 per cent in total return terms.
Performance of sectors vs index in 2018
Source: FE Analytics
As such, just 26.39 per cent of active UK equity managers outperformed the S&P United Kingdom BMI benchmark last year down, from 53.6 per cent in 2017. The average asset-weighted return for a UK equity fund in 2018 was a loss of 10.33 per cent, compared with a fall of 9.28 per cent for the index.
Over a longer 10-year period, 73.5 per cent of funds underperformed the benchmark. However, this is a slight improvement from one year ago where 75.2 per cent underperformed. According to the report the average, asset-weighted return for an active UK equity fund over the period was 9.66 per cent against a 9.12 per cent gain for the index.
Underperformance over the longer time period was to be expected as the majority of active equity funds failed outperform their respective benchmarks over 10 years.
There was a drop off in performance among UK small-cap funds with more than half (57.1 per cent) underperforming the S&P United Kingdom SmallCap index last year, compared with just 19.7 per cent in 2017. However, there was a small improvement over 10 years.
“Small-cap stocks were generally the worse hit as investors sought safer havens,” added Innes. “Since the typical active fund in most countries has a predominant small-cap bias compared to the benchmark weighted indices, they were arguably more vulnerable to losses.”
The average UK small-cap fund made a loss of 12.84 per cent over one year, slightly greater than the 12.16 per cent fall for the benchmark.
There was a significant deterioration in sterling-denominated active Europe ex-UK equity funds where just 18.5 per cent outperformed the S&P Europe ex-UK BMI index compared with 43.8 per cent one year ago. Performance over 10 years also worsened with 79.9 per cent underperforming the benchmark compared with 73.5 per cent at the end of 2017.
Global equity funds also saw a big jump in underperformance over one year with the percentage of outperformers falling from 47.3 per cent in 2017 to just 23.3 per cent at the end of last year.
As the below chart shows, the average IA Global and IA Global Equity Income fund underperformed the MSCI World index, another commonly used benchmark in each sector.
Performance of sectors vs index in 2018
Source: FE Analytics
It also remains difficult for active managers to outperform over the long term with just 7.7 per cent beating the S&P Global 1200 index.
There were also low double-digit percentage point increases in underperformers for sterling-denominated emerging markets and US equity funds over one year.
Underperformance of US equity funds came despite the S&P 500 being the only benchmark in positive territory last year.
“Initially robust US market strength gave way to fears of an earnings slowdown, precipitated by disappointing financial results from high-profile information technology stocks in Q4 2018,” the report noted.
“Despite heavy declines in the S&P 500, US dollar strength over the year offset some of those losses for investors based in Europe.”
The difficulty of outperforming the US equity market has been well-documented given how well-covered by analysts and its efficiency. As such, just 8.1 per cent of active US equity funds have outperformed the benchmark S&P 500 index over 10 years.
In 2018, the average fund made a loss of 1.33 per cent compared with a rise of 1.56 per cent for the index. Over 10 years the S&P 500’s 14.5 per cent return outpaces the 12.92 per cent gain for the peer group.
This can be seen in the performance of the IA North America sector against the S&P 500 index, where the average fund has underperformed over the past decade.
Performance of sectors vs index over 10yrs
Source: FE Analytics
“The majority of active fund managers underperformed in all 23 fund categories studied over 2018,” noted the study’s authors.
“From the same 23 fund categories, only Spanish equity funds were able to narrowly outperform their benchmark on average – on an asset-weighted basis – over the year.”
In Spain, where.9 per cent of euro-denominated funds outperformed the S&P Spain BMI index in 2018. Last year the average fund fell by 10.91 per cent, on an asset-weighted basis, compared with a 11.05 per cent fall in the benchmark.
The worst market for underperformance was in the Netherlands, where no euro-denominated active funds managed to beat the benchmark. The average Dutch equity fund fell by 13.87 per cent compared with an 8.72 per cent fall in the S&P Netherlands BMI index.