Passive equity portfolios tracking global equities have stood up to the increased market volatility relative to actively managed global funds this year, according to research by FE Trustnet.
Active global funds, as a group, are well known for struggling to beat the index over the longer term and several commentators such as Equilibrium’s Mike Deverell have pointed out that many portfolios have been traditionally too close to the index with remarkably high charges to boot.
Thanks to increased concerns about slowing global growth and the loss of control of the Chinese economy by its ruling party, this year has seen a historic and substantial one-day crash in August – dubbed Black Monday – and a generally risk-off period from markets either side of this.
However, this has meant active funds have struggled relative to passives once again. According to FE Analytics, only 41 per cent – or 108 of 259 - active portfolios in the IA Global sector have beaten the MSCI World index in 2015.
The average return in the IA Global sector this year has been 2.88 per cent versus a gain in the MSCI World index of 3.98 per cent. The Fidelity Index World fund has returned 4.08 per cent, for example.
Performance of fund, sector and index in 2015
Source: FE Analytics
The rate of outperformance of active global funds tends to be relatively low, when compared to other sectors, regardless of market conditions.
In contrast a number of FE Trustnet studies have shown how active managers in the UK equity space have largely outperformed the FTSE All Share so far this year with the huge falls in some sectors such as mining as well as some of the other largest names in the FTSE 100 – which has created a great of dispersion in the overall market.
In a study last year FE Trustnet revealed that over the previous three years more than 75 per cent of global funds had underperformed. Almost 80 per cent finished 2014 behind the index.
During the weakest part of 2015 between April and Black Monday when the MSCI World index lost 15.96 per cent and no fund was in positive territory, slightly more than one in two active funds stayed above the index although this clearly did last in the snap back in markets.
Performance of fund, sector and index April – August 2015
Source: FE Analytics
Of course the numbers for 2015 year represent some improvement on last year and this pulls up the past three years’ figure somewhat from but still less than only 39 per cent of active funds are ahead of the MSCI World index over three years.
Performance of sector and index over 3yrs
Source: FE Analytics
Over five years just 20 per cent of active funds are ahead of the index. Over 10 years it is about a third that have outperformed.
SCM’s Gina Miller thinks the relatively poor performance of active global funds is due to several factors apart from those affecting markets.
“In a way it is surprising that so many active funds are faring so badly in 2015 when the vast majority are significantly overweight smaller/medium sized stocks which have outperformed significantly in the UK and Europe,” Millar said.
“It is more a reflection of a) higher costs and charges and b) the fact that information is disseminated much quicker and to everyone these days, thereby eradicating the previous ‘information edge’ of an active manager.”
The broad sell off in risk assets over the course of 2015 was due to a panic by investors following several years of strong gains, with this anxiety now receding and markets snapping back, according to Invesco Perpetual’s chief investment officer Nick Mustoe.
“The outlook for global economic growth has been clouded by the focus on China and the rebalancing of its economy. However, global equity market volatility and fears of a hard landing in China which dominated in August and September are gradually receding from memory,” he said.
He adds that while the risk appetite for both stocks and bonds diminished at the same, against their usual habit of rising and falling in contrast. He says this suggests the falls were more to do with panic than fundamentals.
“I don’t think that China will have a hard landing and I don’t think that there will be a global recession. China’s economic slowdown has been taking place for a number of years. I think it’s a natural function of an economy that’s developing reasonably well.”
“However, there are signs of stabilisation and fears around what this could mean for Asian equity markets have been somewhat overblown, in my view. The volatility we saw across global financial markets in recent months, and which was amplified in Asian equity markets, left the share prices of some good quality companies looking attractive to us.”