The UK is a market where it pays to take an active approach to investing, with data from FE Analytics and AJ Bell showing 85 per cent of such strategies beat their passive counterparts over the past decade.
This sets it apart from the more efficient US and global sectors where fund managers struggle to beat the market.
“Returns in the last 10 years have been all about where you put your money, rather than who you invested with,” said Laith Khalaf, financial analyst at AJ Bell.
“The US stock market has been the place to be, and that’s reflected in the strong absolute performance of active funds investing across the pond, and global active funds too, because the US now makes up such a large part of the investable international universe.”
He added that it has even been more rewarding to invest in a poorly performing US or global fund than a UK highflyer over this time.
“Active managers as a whole have not thrived in the US and global sectors, and only a small proportion have beaten a typical index tracker,” the analyst continued.
“In contrast, the UK has been a bright spot for active management, with more than eight in 10 active funds outperforming the average tracker, despite absolute returns looking shabby compared with global and US peers.”
However, he said this is not down to the managers, and while many are undoubtedly skilful, the outperformance is more down to structural reasons.
“Active managers tend to be overweight areas [that outperform], while index trackers have most of their portfolio invested in the FTSE 100, because they just invest according to market cap,” he said.
Performance of UK indices over 10yrs
Source: FE Analytics
For example, the FTSE Small Cap index has returned 191.97 per cent over the last 10 years, while the FTSE 250 has returned 147 per cent, compared with 73.01 per cent from the FTSE 100.
“That performance differential gives quite some tailwind to active managers, even if they are only slightly overweight mid and small caps,” said Khalaf.
“Indeed, this helps to explain why there are so many ethical funds at the top of the performance table in the UK, because their focus on ESG credentials naturally leads them away from the big blue chips to more modestly sized companies.”
He noted that multi-cap funds also feature heavily at the top of the performance table for the same reason.
Top-performing UK funds over 10yrs
Source: FE Analytics
The analyst contrasted the outperformance of UK mid and small caps to the US where the best returns have been derived from mega-cap stocks such as Apple, Alphabet and Amazon.
“These stocks will be in the top holdings of passive funds in both the US and global sectors, lifting the bar that much higher for active managers operating in these areas, because these companies have delivered such high returns,” he continued.
“The high returns of the US mega-cap stocks, combined with a well-analysed, efficient market, means that the average tracker fund actually nestles just inside the top quartile of active US funds.
“Or in other words, it’s possible for a US fund to have just made it into the top quartile of its active peers, and still have underperformed the average passive fund.”
He finished by saying that there is a much wider dispersion of returns among passive funds compared with the US, with some funds posting performance slightly below their benchmark index.
This, Laith added, lowers the threshold UK active managers need to beat to outperform the average tracker.
“In part, this again comes down to the highly divergent performance of small and mid caps compared with large caps, because some of the trackers available to UK investors simply follow the FTSE 100.
“But even looking at funds tracking the broader FTSE All Share, the best-performing passive fund returned 84 per cent over 10 years and the worst performer returned 66 per cent.
“This comes down to that silent destroyer of tracker performance – charges.”
He said that while many tracker funds are keenly priced to support investor demand, there are still a few “tracker slackers” around – passive funds which charges fees more commensurate with an active approach.
“If your gross returns are simply the index, high charges on a tracker fund are going to lead to substantial underperformance over the long term,” Khalaf added.
“It just goes to show, even tracker funds aren’t created equal, so if investing passively, you still need to exercise some discretion when it comes to fund selection.”