This year appears to be another difficult one for active managers as research by FE Trustnet shows that a higher proportion of equity funds are falling to match the gains being seen in the market.
Many of the articles written in 2018 have started by pointing out that this year appears to be another challenging one for investors to navigate, after its bullish start turned into a broad-based sell-off and volatility spike.
Given this environment, equity markets have made some progress although this has been rather limited thanks to overhanging worries such as the trade tariffs being championed by US president Donald Trump.
Source: FE Analytics
In this research, we wanted to see how funds in the Investment Association universe are holding up in these conditions. To do this we compared the performance of the average fund and the individual members of the 10 main equity sectors with one of the most common benchmarks in each peer group.
The table above shows how the performance of the average fund in each sector stacks up to the index. As can be seen, the IA UK Smaller Companies sector is the clear winner as its average member made a total return that was 6.32 percentage points higher than the FTSE Small Cap (ex IT) index in the first seven months of 2018.
While this is below the 11.57 per cent excess return achieved by the sector in 2017, it looks strong when compared with history. Over the decade to the end of 2017, the sector averaged being just 1.07 percentage points higher than the index in each calendar year.
The IA UK All Companies sector is the only other where the average fund is higher than the index, in this case the FTSE All Share. However, the sector has outperformed the index by just 32 basis points in 2018-to-date and this is below the 10-year annual average of 41 basis points.
At the bottom of the table we have the IA Global Equity Income sector, where the average fund lagged the MSCI World index by 4.25 percentage points in the opening seven months of 2018. This is somewhat worse than its 10-year average – although this is hardly stellar as this stands at an average annual underperformance of 1.66 percentage points.
As we’ve seen before, global equities tend to be a difficult arena for active funds to outperform in. The IA Global sector has been the second worst performer in this research as its average member is 1.89 percentage points behind the MSCI World, lagging the 10-year annual underperformance of 1.63 percentage points.
IA Global Emerging Markets isn’t far behind as it has fallen behind the MSCI Emerging Markets index by 1.88 percentage points. Despite this being an area where active managers argue they can add value, the sector has underperformed the index by an annual average of 65 basis points over the past decade.
Source: FE Analytics
For the second half of this study, we examined the portion of funds that are outperforming the index for each of the sectors. As the table above shows, this resulted in the same winners and losers.
In the IA UK Smaller Companies sector, 98 per cent of funds were beating the FTSE Small Cap (ex IT) index in the first seven months of 2018. This means that only one fund – MI Downing UK Micro-Cap Growth, which was down 7.56 per cent – was behind it.
Over the 10 calendar years spanning 2008 to 2017, an average of 59 per cent of IA UK Smaller Companies funds outperformed this particular index. The strongest full year was 2017 when 96 per cent of members were ahead of the index; the weakest was 2012, when only 5 per cent outperformed.
The best performer in this peer group over 2018 so far is Liontrust UK Micro Cap, with a 14.76 per cent gain, followed by Marlborough Nano Cap Growth (up 13.7 per cent) and Jupiter UK Smaller Companies (13.06 per cent).
IA UK All Companies comes in second place as 58 per cent of its members beat the FTSE All Share in the year to the end of July. This puts it a little ahead of the 50 per cent 10-year average and is an improvement on the 46 per cent of funds that outperformed in 2017, but is well below the 72 per cent achieved in 2015.
Sitting at the bottom of the table again is the IA Global Equity Income as only 2 per cent of its members outpaced the MSCI World over the period in question. This is significantly below the 35 per cent average seen over the past 10 years.
Guinness Global Equity Income was the only fund to beat the index. It made 6.9 per cent over the seven months in question, just beating the 6.8 per cent posted by MSCI World, although it did underperform the index in each of the four previous years.
The other 55 funds in the IA Global Equity Income sector were lagging the MSCI World over the period, while five of them – Premier Global Infrastructure Income, Aberdeen World Equity Income, Legg Mason IF ClearBridge Global Equity Income, Barclays GlobalAccess Global Equity Income and UBS Global Enhanced Equity Income – were in negative territory.
With just 2 per cent of funds outperforming, 2018-to-date is the IA Global Equity Income sector’s worst period for outperformance over the periods examined in this research by some margin – the next weakest period was 2014 when only 13 per cent of funds were ahead of the index.
Two other sectors – IA Europe Excluding UK and IA Global Emerging Markets – also have the lowest proportion of funds outperforming the index when compared with the previous 10 full calendar years.
If we take all the sectors in one, then just 39 per cent of funds outpaced their most relevant index over 2018’s first seven months. This is some way behind the 59 per cent of funds that outperformed in 2010 and below the 10-year average of 49 per cent.
However, a limited degree of comfort could be taken from the fact that this is not the worst result uncovered in this research; in 2016 – which was a very difficult year for active managers given the Brexit result and the Trump presidential win – only 32 per cent of funds in these 10 equity sectors were able to outperform the index.