UK equity fund performance in 2016 has given further fuel for supporters of tracker funds in the long-running active versus passive debate. 
In many cases, active managers failed to keep pace with markets last year as a strong rally and a shift in investment styles wrongfooted many experienced investors.
Alex Paget (pictured), analyst at Kepler Trust Intelligence, says 2016 was a “dire” year for active managers.
Paget compared the open and closed-end UK All Companies and UK Equity income sectors with the FTSE All Share and UK Smaller Companies strategies with the Numis Smaller Companies ex ITs, for reference.
Just 12.9 per cent of UK equity investment trusts outperformed their respective indices in 2016, compared with 15.3 per cent in the open-ended space.
In comparison, 2015 saw 80.7 per cent of closed-end and 81.4 per cent of open-ended UK fund beat their indices.
The analyst said the swing in performance in 2016 could be attributed to sector positioning rather than poor stockpicking. He noted that a majority of managers had been underweight in the mining and energy sectors, favouring domestically-focused small and mid-cap stocks.
That trade worked well in 2015 against improvement in the UK economy, but unwound in 2016 as Chinese stimulus spurred the commodities sector and UK small and mid-cap sector suffered in the aftermath of the UK referendum result.
The market rotation caught many active managers off-guard, but Paget described 2016 as a “freak year” noting that on average the majority of funds had outperformed the indices.
When looking at longer-term returns, Paget says 51.8 per cent of active open-ended funds and 56.6 per cent of UK investment trusts had beaten their respective indices over between 2000 and 2016 on average.
Source: Kepler Partners
Paget said: “The major point about active management is that funds will go through periods of under and outperformance throughout the cycle depending on whether or not their investment style is in favour.
“The aim, of course, is to find managers whose periods of outperformance outweigh the periods of underperformance.”
But one issue that has dogged the active versus passive debate has been survivorship bias.
Survivorship bias occurs when only funds that continue to trade are considered, excluding those that have been shut down. Paget says survivorship bias can often skew results in active versus passive studies as underperforming funds close.
Research by Kepler Trust Intelligence took in every IA fund and AIC UK trust in existence since 2000. Excluding funds that have shut or merged, actively-managed open-ended funds performed “significantly better” says Paget, as shown by the table below.
Source: Kepler Trust Intelligence
Paget said: “Without survivorship bias, however, the ‘average’ IA UK All Companies and IA UK Smaller Companies funds have underperformed.”
The analyst said that 160 funds had been closed or merged between 2008 and 2016, with the total number falling by 18 per cent over the same period.
In comparison, 17 UK closed-ended funds have closed since 2008 with the total number declining by 17 per cent.
“Despite this, survivorship bias has had the opposite effect in the UK trust space,” Paget explained. “The more thorough analysis – including funds which are now closed – actually shows better performance figures.”
Paget says performance figures for investment trust sectors where survivorship bias is taken into account were “significantly higher” than when it is ignored, with the exception of the AIC UK Smaller Companies sector.
Source: Kepler Trust Intelligence
He added: “What this shows, therefore, is that many of the UK trusts that have been launched since 2000 have gone on to outperform and suggests that many trusts that have since been liquidated delivered decent NAV returns.”
Of existing UK equities funds the £164.4m, five crown-rated Rights & Issues investment trust was the best performer. The self-managed UK smaller companies investment trust returned 873.55 per cent since the beginning of the century.
From the IT UK All Companies, the £590.3m, four crown-rated Fidelity Special Values was the second-best performer over the period. Currently overseen by FE Alpha Manager Alex Wright, the closed-end fund has generated a total return of 743.72 per cent.
Top 10 best performing trusts 2000-2016
Source: FE Analytics
Paget added: “Given the amount of poor performing portfolios that have been closed and resigned to the history books, there will always be investors who will always believe outperformance revolves around luck and want to go down the passive route due to past experiences.
“At the same time, however, history proves that certain active managers can add genuine value – and our research shows that a higher proportion of those are investment trusts.”