Some 45 per cent of UK active equity funds underperformed a representative benchmark during the first half of the year, data from S&P Dow Jones Indices has revealed, although small-cap strategies managed to buck the trend.
Equity markets sold-off sharply during the first quarter of the year as the Covid-19 pandemic began to unfold and, while they began to recover as huge sums in stimulus were announced to prop up economies around the world, they were still recovering at the end of June.
Having begun the year on a more positive note regarding Brexit as some uncertainty was removed by the general election, UK equities have failed to rally as hard as their developed markets counterparts as the EU negotiations took a backseat to the pandemic and uncertainty returned.
As the below chart shows, the FTSE All Share has lost 17.51 per cent during the first half of the year compared with an 1.43 per cent return for the MSCI AC World ex-UK index.
Performance of indices during H1
Source: FE Analytics
And this performance can be seen in the latest bi-annual S&P Indices Versus Active Funds (SPIVA) Europe Scorecard, which found that while 45.22 per cent of active UK equity strategies underperformed the S&P United Kingdom BMI index. 
That figure rose for mid- and large-cap strategies, with the report revealing 52.15 per cent of UK large- and mid-cap strategies underperformed the representative benchmark – the S&P United Kingdom LargeMidCap index.
However, this underperformance didn’t extend to funds focused lower down the market cap structure with just 22.22 per cent of UK small-cap funds underperforming the S&P United Kingdom SmallCap index.
First-half results were broadly similar in Europe, with 48.95 per cent of Europe ex-UK strategies underperforming the S&P Europe Ex-UK BMI index in sterling terms, and for global equity funds, where 48.68 per cent underperformed the S&P Global 1200.
More than half of US and global emerging market strategies underperformed their representative benchmarks during the first six months of the year: some 59.27 per cent of US funds underperformed the S&P 500, while 61.88 per cent of emerging market strategies underperformed the S&P/IFCI Composite index.
Andrew Innes (pictured), EMEA head – global research and design at S&P Dow Jones Indices, said: “As the S&P Europe 350 experienced its highest levels of volatility since the 2008 financial crisis and the largest single-month drawdown in almost 20 years, the widely held belief that market volatility should create widespread opportunities for active managers remained unproven.”
For active UK equity investors, things were slightly better over one year where two-thirds (68.16 per cent) of strategies outperformed the benchmark, although this was down from 72.53 per cent at the end of 2019.
There was a significant improvement in small-cap outperformance over one year compared with end-2019 finding, rising from 40 per cent to 82.72 per cent outperformance of the benchmark.
But for investors all other major regions it has been more challenging 12 months.
Just over half of Europe ex-UK (52.52 per cent) and global equity strategies (56.21 per cent) underperformed the benchmark, rising to 61.88 per cent for emerging markets funds. Furthermore, 70.89 per cent of US equity funds failed to beat the S&P 500.
On a three-year view – the average fund holding period for an investor in the UK – just over half of UK equity funds (56.6 per cent) underperform the benchmark and 38.96 per cent of small-cap strategies.
Over a 10-year period 69.33 per cent of UK strategies underperform the benchmark (58.54 per cent for small-cap funds).
The hardest areas for finding an outperforming manager over the long term are among global and US strategies, where 92.63 per cent and 93.49 per cent underperformed the benchmark. However, the US market is widely acknowledged as one of the hardest to outperform given how efficient and well-researched it is; its size means it also forms a large part of global indices.
For the first time, the SPIVA report has also included risk-adjusted fund underperformance to counter arguments that active managers may invest with less risk than their benchmarks.
The risk-adjusted return is calculated as the annualised average monthly return divided by annualised standard deviation of the monthly return for the measured period.
On a risk-adjusted return basis, UK equity funds performed better with 87.71 per cent outperforming the S&P United Kingdom BMI benchmark (87.65 per cent for UK small-caps).
Although performance falls back for UK strategies over the long term with 79.05 per cent underperforming over 10 years.