Skip to the content

Active UK managers lose ground to passives in 2014

25 November 2014

The average active manager has failed to keep pace with All Share trackers, although some have been able to outperform significantly.

By Gary Jackson,

News editor

The average active manager investing in FTSE All Share stocks has underperformed passive funds over 2014 so far, according to FE Trustnet research, as the market turned against the small and mid-cap areas that had previously soared.

 

Many investors expected 2014 to be a time when stock pickers could shine, following the strongly rising markets of the past couple years which meant investors in passives had been well rewarded.

 

The FTSE All Share has found it difficult to make progress in 2014. At the start of February the index was down 4 per cent, according to FE Analytics, after investors became concerned by the threat of deflation in the eurozone.

 

Performance of indices over 2014

 

Source: FE Analytics

 

However, by the end of February the index was 3.2 per cent up since the start of the year as global equities shrugged off their worries and started to rally. It then bounced around over the mid part of the year, before selling off in October and September.

 

As it stands now, the FTSE All Share is up 2.74 per cent over 2014 after it recovering from 9.71 per cent plunge in the autumn. But how have the funds benchmarked against it done?

 

We created two portfolios - one including all the active funds from the IMA All Companies sector that use the All Share as their starting point and one holding at the passive trackers of the index.

 

Over 2014 to date, neither has managed to keep pace with the index and the portfolio of active funds has returned significantly less than the passives.

 

The average active All Share fund is up just 0.97 per cent between the start of 2014 and 21 November; the average tracker, on the other hand, has gained 2.5 times as much - 2.51 per cent.

 


 

Performance of portfolios and index over 2014

Source: FE Analytics

 

Thomas McMahon, FE Research fund analyst, said: “This year saw a violent and sudden rotation in March which caught out most managers. Mid-caps and small-caps sold off after a sustained period of outperformance which many managers had made the most of. Overweighting the mid and small caps helped most active managers to outperform last year.”

 

“Since then the FTSE 100 has outperformed, and many managers were and are underweight this part of the market. On top of this, it’s harder to add value in this part of the market because the dispersion of returns is lower: if you get a call, right the chances are you will add a much smaller amount of alpha.”

 

“Many managers thought that the FTSE 100 would do better this year, but they have also been hit by the two obvious value plays in the FTSE 100 – oil and mining – not paying off as hoped for. Mining has had a rough year, and the unexpected plummeting of the oil price has hit the oil and gas sector too, although Shell has done well.”

 

“You were also able to make money in 2013 by buying momentum – essentially buying stocks which have recently done well. These stocks, which tended to be in high growth areas such as tech and the internet, sold off very fast in March, and this was another area in which managers had been adding alpha.”

 

Of course, within the funds within this portfolios have experienced widely differing returns over the past 11 months.

 

Two of Mark Slater’s portfolios have made the strongest returns in the 180 or so funds that use the FTSE All Share as their starting point. His £145.4m MFM Slater Growth fund has returned 15.70 per cent over 2014, putting it in first place, while his £34m MFM Slater Recovery fund is in second with a 15.24 per cent gain.

 

MFM Slater Growth is currently first quartile in the IMA UK All Companies sector over one, three and five years, as well as over three and six months. MFM Slater Recovery is first quartile over one year, but fourth over three years and second over five years.

 

Slater can invest across the cap spectrum but has a bias towards the smaller end of the market. However, a concentrated portfolio and stock-picking have allowed him to outperform his peers.

 

Performance of funds vs index over 2014

Source: FE Analytics

 

The next four top-performing funds are Invesco Perpetual UK Strategic Income, Invesco Perpetual High Income, Invesco Perpetual Income and SJP UK High Income, which all have high allocations to the large and mega-cap parts of the UK stock market.

 

The three Invesco Perpetual funds are managed by FE Alpha Manager Mark Barnett, who took over High Income and Income from Neil Woodford in March this year. Woodford is manager of SJP UK High Income.

 


 

As McMahon notes above, small and mid-caps had a strong run during recent years, but this came to an end in 2014 when the FTSE 100 started to outperform, aiding managers such as Barnett and Woodford.

 

The worst UK fund from our active sample is Gerard Callahan’s £119m Baillie Gifford UK Equity Alpha, which has lost 12.42 per cent. The fund has a high weighting to mid-caps, which as noted have underperformed.

 

However, the fund has been awarded an ‘A’ rating by Square Mile, which warns against its concentrated approach being held to account over short time horizons.

 

“The fund is managed with a long-­term focus where the team are looking to identify what a company's earnings might be in three to five years and not focused on the next quarter's numbers. As such this fund should only be held by those with a similar investment time frame,” the consultancy said.

 

Schroder UK Opportunities is the second worst performer year to date with a 9.28 per cent loss. This is in contrast to its very strong long-term numbers, which see it sit first quartile in the IMA All Companies sector over three and five years.

 

But the fund has faced several headwinds over 2014, including the departure of former manager Julie Dean, concerns over its growing size and then strong outflows.

 

Last week Goldman Sachs Asset Management chief investment officer of international equity Suneil Mahindru told FE Trustnet that stock-picking will be even more important in 2015 as correlations within the market are likely to decline further.

 

“We think the world is becoming more complicated. Correlations are coming down though, interestingly, they spiked up again in the recent sell-off,” Mahindru said.

 

“What matters now is stock selection. I would say this, wouldn’t I, but it is more the time for active stock selection than it has been in the past because you will see bigger differentiations.”

 

“You have to think about, who are your active managers? Who do you want to invest with? Who do you have the confidence, when they are underperforming, to give more? That’s how I look at it.”

 

 

ALT_TAG

Editor's Picks

Loading...

Videos from BNY Mellon Investment Management

Loading...

Data provided by FE fundinfo. Care has been taken to ensure that the information is correct, but FE fundinfo neither warrants, represents nor guarantees the contents of information, nor does it accept any responsibility for errors, inaccuracies, omissions or any inconsistencies herein. Past performance does not predict future performance, it should not be the main or sole reason for making an investment decision. The value of investments and any income from them can fall as well as rise.