UK small- and mid-caps, along with Asian and European stocks, were the easiest equity markets for active managers to beat in 2020, analysis by Trustnet suggests, while global, US and Indian markets were the hardest.
Last year saw equity markets rattled by the coronavirus pandemic and massive disruption to the global economy, before giant fiscal and monetary stimulus resulted in most major equity indices delivering positive returns for investors.
Against this backdrop, Trustnet looked at the major equity benchmarks that have more than 10 active funds measuring performance against it and determined what percentage of managers were able to beat them.
Source: FinXL
The UK equity market was one of the easier markets to beat in 2020 for small- and mid-cap funds. As shown in the table above, an overwhelming majority of active UK small-cap funds benchmarked against the FTSE SmallCap and Numis Smaller Companies indices managed to beat the market.
The UK small-cap fund that beat the benchmark by the most was the £282m Baillie Gifford British Smaller Companies fund, which returned 32.03 per cent during the year. This was far above the Numis Smaller Companies Excluding Investment Companies index’s 4.29 per cent drop.
The £121m FP Octopus UK Micro Cap Growth fund also performed exceptionally, with a return of 34.67 per cent, well above the Numis Smaller Companies plus AIM (excluding investment companies) benchmark return of 4.93 per cent.
In the mid-cap space, more than 80 per cent of active funds benchmarked against the FTSE 250 managed to beat the index.
The top performer was the £3.4bn Merian UK Mid Cap fund, which returned 10.83 compared to a loss of 8.48 per cent from the FTSE 250 benchmark.
Active managers appeared to have thrived in the small- and mid-cap space, which is often considered to be under-researched and relatively illiquid.
Indeed, smaller businesses often face higher risks and, in many cases, go bust, which can provide active managers an opportunity to leverage their expertise to avoid them and generate index-beating returns.
UK large-cap counterparts were less successful, however, with only around 60 per cent of active funds beating the FTSE All Share. This is the most common benchmark in the Investment Association universe, with 234 funds using it.
It is worth noting that many UK equity income strategies are benchmarked against the FTSE All Share, which would have affected the percentage of active funds that managed to outperform given last year’s difficulties for income investors.
After all, equity income funds were hit hard by the concentration of high dividend payers in the industries most affected by the pandemic and forced to cut payouts, the oil majors and banks being prime examples.
Although 28 IA UK Equity Income funds managed to outperform the FTSE All Share during the year, not one of them posted positive total returns.
UK funds that were underweight companies that operate in sectors worst affected by the pandemic, such as energy, financials and retail, managed to relatively perform well.
Performance of fund vs sector and index in 2020
Source: FE Analytics
A case in point is the £205m Baillie Gifford UK Equity Focus fund, the top performer by a wide margin, returning 16 per cent during the year versus a 9.82 per cent loss from the FTSE All Share.
The managers at the fund said in their interim report that a large part of their outperformance was down to not having exposure to high street banks and oil majors when the crisis struck.
The table also shows a relatively large percentage of funds managed to outperform the MSCI AC Asia ex Japan, MSCI AC Asia Pacific ex Japan and the MSIC China benchmarks.
For example, roughly three-quarters of funds benchmarked against the MSCI AC Asia managed to beat the benchmark’s 21.16 per cent for the year.
The fund that exceeded that benchmark by the most was the £2.4bn Baillie Gifford Pacific fund with a 60.36 per cent return. It is run by Roderick Snell and Ewan Markson-Brown, who have a large allocation to China and have previously said investors are underweight the vast opportunity in China.
European equity markets, as represented by the MSCI Europe ex UK and the MSCI Europe, which returned 7.49 and 2.13 per cent respectively, also had more active funds able to beat the benchmark.
Over 70 per cent of funds benchmarked against MSCI Europe, 63 per cent of funds using FTSE World Europe ex UK and 54 per cent of funds using MSCI Europe ex UK managed to outperform.
Some notable standout performers were the £2.5bn Baillie Gifford European and the €1.5bn Comgest Growth Europe Opportunities funds with a 43.24 and 33.24 per cent return respectively for the year.
Much of Europe was heavily impacted by the coronavirus pandemic last year, which forced the continent into widespread lockdowns and ground most economic activity to a halt.
Baillie Gifford European, however, had a large weighting to European technology and e-commerce firms that thrived in such an environment with the likes of Delivery Hero, Spotify and Zalando.
Likewise, Comgest Europe Opportunities benefited from a heavy weighting to Dutch semiconductor supplier ASML, whose sales were not that impacted as its customers typically supply technology companies who thrived in the pandemic.
In the US market, however, less than half of active funds benchmarked against the S&P 500 and the MSCI North America managed to outperform.
In a market where most of the returns came from technology firms, US funds that were underweight the technology sector suffered in 2020.
Global equity markets, which have a heavy weighting to US equity markets, were also a hard market to beat, with only 38.9 per cent of active funds outpacing the MSCI World and 28.6 per cent of active funds beating the FTSE World benchmarks.
By far the hardest market to beat was the Indian equity market, with only around a quarter of the actively managed funds exceeding the MSCI India benchmark’s 11.99 per cent total return.