The debate over active or passive funds continues to rage on, especially with the increasing popularity of active share and closer scrutiny of fund managers’ fees.
We won’t be wading into the argument of whether managers or trackers are best for investors in this article, but using FE Analytics we looked through the various regional equity sectors in the IA universe to see which has been the worst hunting ground for active managers over differing time frames.
It must be noted that the study does have survivorship bias as we are only taking into account funds which still exist, but the research does highlight that certain sectors have been very good for active managers, while others show them in a particularly bad light.
Source: FE Analytics
As the table above shows, the IA Global Emerging Markets sector has been the worst for active managers as just 20 per cent of them – five out of 25 – have managed to beat the MSCI Emerging Markets index over 10 years.
The picture doesn’t look much brighter over short time frames either as while 53.23 per cent have beaten the index over three years, more than two-thirds of the sector’s active funds have underperformed over one and five years.
FE data shows that none of the 25 funds in the emerging markets sector with long enough track records are outperforming the index over one, three, five and 10 years at this point in time while Aberdeen Emerging Markets Equity is the only portfolio to have beaten the index in seven or more of the last 10 calendar years.
Devan Kaloo’s £2.1bn Aberdeen fund, with its quality growth approach, has only underperformed in two years over the last decade – 2007 and 2013 – and has been the sector’s best performing portfolio over 10 years with returns of 263.8 per cent, beating its benchmark by close to 100 percentage points in the process.
Performance of fund versus sector and index over 10yrs
Source: FE Analytics
However, the bad news is that the fund is now soft-closed to new investors, which compounds the problem for those looking for active exposure to the developing world.
Given that managers in the emerging markets sector have such an array of companies to choose from and it is often viewed as an under-researched asset class, it seems odd that so many of them have failed to beat trackers over the years.
Whether it is down to not having ‘feet on the ground’ in emerging market economies or because their charges are too high, FE Alpha Manager Bill McQuaker says there is a genuine lack of quality of in the sector.
“I’ve got no question marks about the quality of the funds that we own, but if you look at the fund offerings that are available to us in UK equities or in European equities we’re blessed with plenty of good propositions to choose from,” McQuaker (pictured) said.
He added: “When you move to emerging markets, it’s harder. There are not as many good offerings.”
It is a similar situation with active global funds. According to FE Analytics, only 31 per cent of funds within the IA Global and IA Global Equity Income sectors, or 31 out of 116, have beaten the MSCI AC World index over 10 years.
That figure is slightly higher over three and five years but over the past 12 months, just 15 per cent – 39 out of 254 – have managed to outperform.
It must be noted that for the purposes of the study we stripped out more specialised global funds, such as those which focus on energy, financials or utilities, so that we only had portfolios which could be easily compared to the global index.
Again, like with emerging markets managers, it seems strange so many have underperformed given that they literally have the whole world to choose from for opportunities.
FE Trustnet has studied the lack of outperformance in the global sectors before and while there is no hard and fast reason why so many struggle against the index, David Hogarty – head of strategy development and global equity strategies at KBI – says there are number of contributing factors.
Hogarty says that, more often than not, global managers run too concentrated portfolios and therefore make calls against the benchmark, be it market-cap or regional, that are “so big and have no influence over”.
He also says global managers, like their peers in other sectors, often fall in love with companies and don’t have the heart to sell when a stock falters or dogmatically avoid areas which are doing well as they think they will underperform at some stage.
Source: FE Analytics
Therefore, Hogarty takes a different approach in his KBI Dividend Plus Developed Equity fund – which has beaten the MSCI AC World index over one, three, five and 10 years – which we will take a closer look at in a coming article.
The results of the study also reiterated the widely-held belief that the US equity market is very a difficult one for active managers to add value in.
Whether it is due to the highly efficient characteristics of the index or because too many managers effectively mimic the benchmark, FE data shows just 32.3 per cent of active funds in the IA North America sector have beaten the S&P 500 over 10 years.
Over five years, just 21.6 per cent have outperformed and while that number increases to 31.6 per cent over three years, a woeful 17.3 per cent (18 out of a possible 104) have beaten the index over the past 12 months.
It is a similar story in the IA Japan sector, where around two-thirds have underperformed against the Topix over three, five and 10 years and just seven out of 55 – 12.2 per cent – have outperformed over one year.
It’s not all bad news for active managers, however, as the research showed that the IA UK All Companies and UK Equity Income sectors were home to a large number which have beaten the FTSE All Share over varying periods.
While 48.2 per cent have beaten the index over 12 months, more than half have outperformed over three and five years and a staggering 80 per cent have beaten the All Share’s returns of 48.92 per cent over five years.
Nevertheless, the study showed Europe has been the best hunting ground for active managers as some 70.5 per cent of IA Europe ex UK sector’s actively managed portfolios have beaten the MSCI Europe ex UK index over 10 years.
There are a number of noteworthy funds in the sector for their consistent outperformance, such as FE Alpha Manager Alexander Darwall’s Jupiter European fund, but one real standout performer is Henderson European Selected Opportunities.
Performance of fund versus sector and index over 10yrs
Source: FE Analytics
While the £2.1bn fund has only been run by FE Alpha Manager John Bennett since February 2010, as the graph above shows, it has had a very good long-term track record of outperformance.
According to FE Analytics, it has been a top quartile performer over cumulative one, three, five and 10-year periods and has beaten the MSCI Europe ex UK index in eight out of the last 10 years – the exceptions being 2009 and 2010 when it delivered third quartile returns.