Active UK funds beat trackers in recent turbulence
09 January 2015
The FTSE All Share beat the average UK growth fund for the first time in three calendar years in 2014, though the index has fallen far steeper than the UK All Companies sector in recent months.
Our data shows both sectors have lost around 2.5 per cent since 5 December, compared to just over 4 per cent from the index. Though the impact of costs should result in FTSE All Share trackers slightly underperforming, they have held up slightly better than the index, but less so than their actively managed rivals.
Active managers’ underweight to the oil & gas and mining sectors – namely mega caps BP, Shell, BG and BHP Billiton – has been the biggest reason for the superior performance.
FE data shows 89 per cent of funds across the two sectors have beaten the All Share, which is considered to be the natural benchmark in both cases, since the turmoil began.
All but three funds have beaten the FTSE 100, which has a higher overall weighting to the stocks mentioned above. It has lost 4.74 per cent over the period.
Slowing demand from developed and emerging economies and oversupply have seen the oil price half since June last year and fall 22.43 per cent since 5 December.
In turn some oil & gas stocks have plummeted, with BP and BG both down more than 7 per cent. Though the companies are among the 10 biggest in the FTSE, only 16 of the 373 funds across the two sectors hold both in their top-10.
Performance of average tracker, sectors and indices over 3months
Source: FE Analytics
Weak economic numbers from China and a collapsing iron ore price have also resulted in a poor bout of performance for many mining stocks of late. BHP Billiton, which is held by 19 UK growth and UK equity income funds, has fallen 9.06 per cent in just over a month.
Unsurprisingly, it’s been the UK funds that are overweight oil & gas that have struggled. FTSE 100 trackers dominate the list of the worst performers, while FF&P Core UK Equity, which has 16 per cent of its assets in BP and Shell, is also among the top worst performers.
The margin of outperformance for active UK equity managers is even larger since October, at around 4 percentage. However, over the calendar year of 2014 the average UK All Companies fund fell short of the index, albeit marginally.
This was the first time active managers underperformed the index since 2011 and only the second time since 2008. They still managed to beat the average FTSE All Share tracker, though.
While an underweight to oil majors helped active funds in the last quarter of the year, many were caught out by an overweight to small and mid-cap stocks in the first half of 2014, which finally underperformed large caps after a stellar run in 2012 and 2013.
UK Equity Income funds remained on top, however, managing returns of 3.16 per cent across the whole of 2014. Managers in this sector tend to have a lower weighting to small and mid-caps.
Source: FE Analytics
Cumulatively, active managers remain well on top over the medium term. FE data shows both the average fund in the UK Equity Income and UK All Companies sectors has outperformed the average FTSE All Share tracker over three and five years, by more than 10 percentage points in both cases.
They’ve also returned more over the past decade, though by a slightly smaller extent.
Performance of average tracker, sectors and index over 5yrs
Source: FE Analytics
Ben Willis, head of research at Whitechurch Securities, says the impact of sector performance on trackers and actives often evens itself out. That said, he is currently wary of using passives for UK exposure because of their natural overweight to certain areas.
"When you invest in a tracker you are to some extent a hostage to fortune. Active managers can be a bit more defensive," he said.
"It's very much swings and roundabouts though. Back when oil was $147 a barrel these oil stocks were driving performance. However, at the moment I would be cautious of using trackers or even funds with a large cap bias, because oil and mining is such a big component."
There are some active UK managers who have consistently outperformed the All Share, in a number of different market conditions. Royal London UK Equity Income and CF Lindsell Train UK Equity, for example, have beaten the index in every calendar year since 2007.
"These are the sorts of funds we use as core positions in a portfolio," said Willis. "They can of course experience some periods of underperformance but are very consistent."
"We use these funds at the centre of a portfolio and then use satellite holdings around them. These are more tactical plaus, which we think are set to outperform over a 12, 24 or 36 month period."
FE Trustnet will be conducting a series looking at the most consistent funds across a number of asset classes in the coming weeks.
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