More than 80 per cent of active UK equity strategies failed to beat their benchmark over one year to the mid-point of 2019, according to data from S&P Dow Jones Indices, although there was some improvement over the three-year period since the Brexit referendum.
After a challenging end to 2018, the biannual S&P Indices Versus Active Funds (SPIVA) Europe Scorecard found that many strategies struggled to recoup the losses during the first half of the year.
“The steep declines seen across equity markets in late 2018 were accompanied by near-ubiquitous underperformance across the fund categories’ asset-weighted returns,” the firm noted.
“As markets improved in the first half of 2019, active managers were generally not able to make up for lost ground. Among the 23 categories of active funds domiciled in Europe, all but three underperformed over the one-year period ending 30 June 2019.”
Apart from challenging conditions for markets, UK equity managers have had Brexit uncertainty to contend with and the appointment of a ‘hard Brexit’ proponent as prime minister in Boris Johnson.
As such, UK strategies experienced greater underperformance of the S&P United Kingdom BMI benchmark, with 81.49 per cent of UK equity strategies lagging behind over the year to 30 June, compared with 73.41 per cent at the end of last year.
The equal-weighted average return for a UK equity strategy over the year was a loss of 2.82 per cent, compared with a loss of 1.2 per cent for the benchmark.
As the below chart shows, the average IA UK All Companies and IA UK Equity Income funds both underperformed the FTSE All Share index, which was up by 0.57 per cent over the one-year period.
Performance of sectors vs index over 1yr
Source: FE Analytics
There was a significant deterioration in UK small-cap equity performance over the one-year period, as 79.75 per cent failed to outperform the S&P United Kingdom SmallCap index over one year, compared with just 57.14 per cent six months earlier.
The sector made a loss of 5.97 per cent compared with a 1.98 per cent loss for the benchmark.
There were some encouraging signs, however.
The data from S&P Dow Jones Indices showed that just under 70 per cent of UK small-cap funds outperformed the benchmark over the three-year period, up from around 62 per cent at the end of last year.
Over three years, the equal-weighted annualised return for the sector was 13.96 per cent compared with a 10.68 per cent gain for the benchmark.
There was also a significant improvement in the percentage of UK equity strategies outperforming the benchmark. At the end of last year, just 19 per cent had outperformed the index over three years; by June this had risen to 47 per cent.
The best performing strategy over the one-year period ending 30 June was emerging markets equity, as 51.89 per cent outperformed the relevant S&P/IFCI Composite benchmark. This was a significant improvement on last year’s result where three-quarters of active emerging market strategies underperformed over one year.
The average return for the emerging markets equity sector was 5.52 per cent compared with a 4.95 per cent rise in the benchmark.
As the chart below shows, the average IA Global Emerging Market fund made a 6.15 per cent return compared with a 4.99 per cent gain for the MSCI Emerging Markets index, the most commonly used benchmark in the sector.
Performance of sector vs index over 1yr
Source: FE Analytics
“Despite their notable performance over the one-year period, 87 per cent of emerging market equity funds outperformed over the 10-year period,” analysts noted.
The worst performing group of active equity strategies over one year was found among the Europe (including UK) equity peer group where just 12 per cent managed to beat the S&P Europe 350 index.
Europe ex-UK equity strategies were the worst performers over the three-year period, with 78.29 per cent failing to outperform the S&P Europe ex-UK BMI index.
Over the long term there were few big changes to report, although there was a slight deterioration in the outperformance of the S&P 500 by active US equity funds.
The US index is notoriously hard to beat, as it one of the most well-covered markets in the world.
At the end of 2018, 18.11 per cent of US equity strategies had outperformed the S&P 500 index over a 10-year period. However, that figure had fallen to just 5.42 per cent by the end of June.
According to S&P DJI data, over 10 years the annualised return for the US equity sector was 15.60 per cent compared with 17.7 per cent for the S&P 500.
The global index is also difficult for active managers to outperform over the long term, with just 6 per cent managing to beat the S&P Global 1200 index over 10 years.
While there was a slight deterioration in long-term performance, active UK equity strategies remained some of the best outperformers over the 10-year period.
Both broad UK equity strategies and those with a small-cap focus had the best track record, with 15 per cent of funds in each category managing to outperform their respective indices.
The 10-year annualised return for the UK equity sector is 11.01 per cent compared with a 10.45 per cent gain for the benchmark. Meanwhile, the UK small cap average returned 13.97 per cent against 14.99 per cent for the index.