A large number of industry giants including Neil Woodford, Nick Train and Mark Barnett failed to outperform the FTSE All Share index in 2016, data from FE Analytics shows.
In fact, only seven out of 59 UK equity funds that are more than £1bn in size managed to beat the index; one of these – Halifax UK FTSE 100 Index Tracking – is an ETF and the remaining six have a value bias.
The struggles investors faced in 2016 have been well-documented, with Hargreaves Lansdown’s head of research Mark Dampier describing the year as experiencing the most hated bull market yet.
In an article published in November last year, he said: “I have never seen a level of bearishness like this - I would probably have to go back to 1988 – amongst professionals, amongst retail clients, the bearishness is just incredible.”
Last year was particularly challenging for UK equity managers, given the Brexit majority vote, the subsequent plummet in sterling and the violent rotation from growth into value during the second half of the year.
Performance of indices in 2016
Source: FE Analytics
As such, it is perhaps unsurprising that so many managers with stellar long-term track records suddenly found themselves struggling to outperform.
Jason Hollands, managing director at Tilney Bestinvest, explains that 2016 was a perfect storm for active managers given the mixture of geopolitical surprises, aggressive style rotation, the fall in sterling bruising mid-caps and the rise in bond yields which negatively impacted so-called ‘bond proxies’.
He said: “Many funds went into the year defensively positioned, with raised cash weightings and underweight exposure to commodities and have therefore been wrong footed by both the overall strength of the equity market this year and the stellar rebound in commodities in the second half, which seems excessive given low GDP growth rates.”
“Given FTSE 100 companies make up 82 per cent of the All Share Index, it is no big surprise that funds that take a more multi-cap approach have struggled to keep up with a market which has seen a sharp differential in performance in favour of larger companies.”
“The unpredictability which was the hallmark of 2016 wasn’t just down to the political shocks of the year, but also the actions of central banks.”
“Remember, last year the US notched rates up for the first time since the credit crisis, flagging the commencement of a gradual hiking phase, but ultimately stood still for a year. China meanwhile, launched another credit blitz, further propping up its excess manufacturing capacity which has been a key factor halting the commodity rout.” 
Arguably the most well-known UK equity manager to underperform is FE Alpha Manager Neil Woodford (pictured), whose £9.6bn Woodford Equity Income fund underperformed its FTSE All Share index by 13.56 percentage points with a total return of 3.19 per cent.
It is also in the bottom quartile for its return relative to its peers, having fallen into 68th place out of 80 funds in the IA UK Equity Income sector for its returns over the year. This is likely to be a result of holding quality large-cap growth stocks while value plays began outperforming significantly during the last few months of the year.
Examples of Woodford’s largest holdings include the likes of GlaxoSmithKline, AstraZeneca and Imperial Brands.
In his latest blog entry, the manager says genuine long-term investors appear to be an endangered species given the industry is now dominated by value-insensitive investing and that there is increased pressure on managers to deliver outperformance over every conceivable time horizon.
“For me, investing has always been about a long-term focus on value, an endeavour that aims to exploit the valuation anomalies that will always exist in financial markets,” he explained.
“It isn’t easy because it involves doing something different to the crowd, having the courage to back your convictions, the humility to constantly doubt them, and the persistence to test the ‘what if I’m wrong?’ hypothesis every single day.”
“This also means that genuine long-term investors have to be prepared to tolerate periods of challenging performance, weathering the hard times. In this regard, it is becoming harder – the availability of data and information allows investors and the media to assess the success or otherwise of investment strategies over inappropriately short time horizons.”
Since Woodford launched the fund in June 2014, it has returned 28.18 per cent, almost doubling the returns of its sector average and benchmark. Since the turn of the century – which of course includes the manager’s time at Invesco Perpetual – he has outperformed his peer group composite by 202.31 percentage points with an average return of 327.96 per cent.
Over in the IA UK All Companies sector, star manager Nick Train also struggled in 2016, with his £3bn Lindsell Train UK Equity fund underperforming the FTSE All Share by 5.44 percentage points.
That said, the fund still managed to return 11.31 per cent compared to its sector average’s return of 10.82 per cent and is therefore in the second quartile versus its peers.
Performance of fund vs sector and benchmark in 2016
Source: FE Analytics
Since FE Alpha Manager Train launched the fund in July 2006, it has been in the top quartile for its returns each year apart from during the fund’s first full year in 2007, went it limped along in the third quartile.
In total, the fund has comfortably doubled the performance of its sector average and benchmark with a return of 226.74 per cent.
In Train’s latest fund factsheet, he notes it has been tough for the fund given the lacklustre returns of Diageo, Heineken, RELX, Sage and Unilever. That said, recent falls in these stocks have led the manager to increase his weightings given how attractive their valuations now look.
“In our opinion these five are better understood and valued as ‘growth’ companies, not government bond proxies. In support, consider that their most recent dividend increases, when averaged across the quintet, were over 10 per cent,” he reasoned.
“It can’t be said often enough - government bonds do not do this, ever. Admittedly, there was some help from the depreciating pound, but still all five are delivering growing dividends at a rate well ahead of inflation. And they are doing so from starting dividend yields also well ahead of inflation.”
“If this continues – real dividend growth, from a starting dividend yield higher than inflation – then these companies will continue to be fine investments. We note the continued drag on performance from the stock market proxies in the portfolio – in particular the three FTSE 100 constituents [Schroders, Hargreaves Lansdown and LSE].”
Another star name in the IA UK All Companies sector to underperform last year is Mark Barnett, with his Invesco Perpetual Income, High Income and Strategic Income funds all returning at least two-thirds less than the FTSE All Share in 2016.
Performance of funds vs sector and index in 2016
Source: FE Analytics
Again, this is likely to be the result of large weightings in quality large-caps including Reynolds American, British American Tobacco and BAE Systems.
Barnett’s overall performance last year is somewhat of an anomaly versus his long-term track record as, since the turn of the millennium, he has almost tripled the performance of his peer group composite with an average return of 552.51 per cent.
In his latest factsheet, it is explained that that the UK stock market achieved positive returns in 2016 due to rising commodity prices and the expectation of fiscal loosening globally.
Amid this, however, it points out that there has been a violent significant rotation due to the fall in sterling, which in turn led to sharp falls in certain share prices.
“The fund manager has continued to favour companies which offer visibility of revenues, profits and cash-flows and which are managed for the primary purpose of delivering shareholder value in the form of a sustainable and growing dividend,” the factsheet states.
“He has avoided investing in the mining sector and has only limited exposure to the oil producers. As a result of this and exposure to the sectors hit in the aftermath of Brexit, the portfolio has failed to match this year’s rise in the stock market.”
“The scale of the decline in Brexit-sensitive sectors was more severe than the fund manager had expected. As a result, whilst there has not been a fundamental shift in sector allocation, he has sought to identify opportunities in certain areas suffering the worst of the sell–off.”
Other star managers that struggled to keep up with the FTSE All Share last year include MFM Slater’s Mark Slater, Fidelity’s Alex Wright and Newton’s Christopher Metcalfe.