More than three quarters of active UK funds outperformed the FTSE All Share index in 2015, according to research by FE Trustnet.
Last year was a tough one for the UK index with a broad range of factors, most importantly a bearish interpretation of China’s economic future by investors, keeping the FTSE Share from making anything better than a marginal return.
According to FE Analytics, the FTSE All Share gained just 0.98 per cent but the average portfolio in the IA UK Equity Income and IA UK All Companies sectors made a return of 6.2 per cent and 4.86 per cent respectively.
Performance of sectors and index in 2015
Source: FE Analytics
Of course our data includes the passives funds that sit in these two sectors of the Investment Association which tend to fall short of the index and so the average active fund is likely to have made a slightly higher.
Combining the two sectors, of the total 357 funds with a track record that include the whole of 2015, 42 are passive vehicles and just 11 of these outperformed the FTSE All Share although most of these are not straight forward UK market trackers as they have a more specialist tilt.
Some 240 of the funds that outperformed the FTSE All Share were actively managed.
Money kept flowing into passives though with the two largest recipients of new cash in the IA UK All Companies sector both trackers.
The numbers showing the strong performance of active funds last year are very much in contrast to 2014 where only about 25 per cent in the UK equity space outperformed. It was also a year that saw a boost in demand for passive funds as cost and ‘benchmark hugging’ became hot issues within the industry.
One of the reasons for the shift in fortunes for the more expensive actively managed funds may have been due to the dire experience of mining firms, of which the UK index has substantial exposure. Oil and gas makes up even more weight of the index - combined with basic materials it is about 15 per cent – and this also suffered.
Performance of indices in 2015
Source: FE Analytics
Due to an ongoing perception that China will drag down demand for commodities, Anthony Willis, investment manager at F&C thinks passives will continue to underperform again this year
“Indices will underperform again in 2016, by that we mean we think it will be a decent environment for stock pickers. Buying the index carries significant risk because it’s giving you exposure to certain sectors which look like they will continue to be weak,” he said.
“You only have to look at the UK FTSE 100 as an example, where you have significant commodity and energy exposure, and that will certainly struggle over the first part of the year.”
“What will be interesting in the second half of the year is that if we do get slowing supply, production cuts etc. that might be supportive for commodity prices. But that doesn’t look likely at the moment, though.”
Another reason that active funds did well was the strength of mid and small caps as their domestic focus shielded negative sentiment from the China crisis.
Performance of indices in 2015
Source: FE Analytics
They were boosted by an improving economic backdrop in the UK and the surprisingly certain general election result. However, this played into the hands of most active managers as they could simply avoid the likes of oil and mining stocks (which make up a large chunk of index) and take relatively big positions in small and mid-caps (which make up a very small proportion of the index) in order to outperform.
Rob Burdett, co-head of the F&C MM Navigator range, thinks mid-caps will continue to outperform in 2016.
“In the rout last year and so far this year, we have seen small and mid-caps outperform in a falling environment whereas in previous environments they have often borne the brunt of it. There is valuation support for that to continue and they are less geared to the problems which have caused these falls.”
“That is one of the key reasons underpinning our belief that active funds will outperform again.”
Another trend was the poor performance of value over quality and growth – shown in the graph below – and by taking quick glance of the underperforming active funds you can see many have a recovery tilt or downright specialism such as Schroder Recovery, Investec Special Situations, M&G Recovery etc.
Rory McPherson, head of investment strategy at Psigma, thinks this trend will reverse somewhat this year as sentiment towards value has been far too negative.
However, he says that as the real value parts of the market are at the top end of the FTSE 100 (which most active funds are underweight), investors might as well buy a tracker rather than an actively managed value fund to play this theme.
“The UK market is at more attractive valuation as there are more parts of the index which are more geared towards global growth such as resources and banks. We expect that market to do better this year and earnings to bounce back.”
“What is interesting there is that we have pushed investors out of active funds, which is generally where we like to go, and into passive products because it has been a very easy ride for active managers in the UK as mid-caps have done very well.”
“However, now, the stuff that is cheap and that you might want to own from a value perspective (the banks, the miners, oil) you can get from a passive allocation and that is what we have done within our portfolios.”
He says going passive gets you into cheap value stocks without paying the fees of an active value manager.
“You are seeing value managers drifting into those stocks, so our view is, why pay the fee?”
Tom Becket, chief investment officer at Psigma, argues a similar point.
“All active funds in the UK seem to be in the similar type of stocks (mid-cap and UK consumer which has been really easy to hold) but if you want to be bullish from here, you need to be a bit more proactive on some of the sectors which have performed poorly such as banks, mining and energy,” he said.
“Also, if the UK market rallies, they will be a pain trade whereby that stuff which has performed the worst then performs best and as you wrote, if you think back to ‘Black Monday’ last August, the shape of markets thereafter some 90 per cent of UK active funds went onto underperform and I can easily see something similar happening again.”
