Emerging markets and North American fund managers have found it most difficult to beat their respective markets over five years, according to research from FE Trustnet, while Japanese smaller companies, UK and Asia Pacific including Japan fund managers have delivered the most outperformance on average.
This follows a piece published yesterday, in which LGIM’s John Roe urged investors to focus on a fund’s ‘base rate’ – or the historic performance of active fund managers in the broader sector over time – before making an investment decision.
“When investing, we believe the use of base rates is essential,” he said. “For example, when deciding whether to invest actively or passively in particular asset classes, as well as what fee is acceptable for doing so, they provide an indication of the likelihood of success for the average investor.”
The head of multi-asset funds also recalled a conference in which 75 per cent of investors believed their European equity funds would outperform their benchmarks over a given time frame. In reality, fewer than 20 per cent of funds in the sector managed to achieve the feat.
As such, we decided to look at all equity growth sectors within the Investment Association universe and decipher the percentage of active managers to have outperformed their relative benchmarks over five years (we excluded income sectors because their aim may be to provide higher income than the index as opposed to greater total returns).
Our findings our shown in the below table.
Source: FE Analytics
As can be seen above, managers in the IA Global Emerging Markets sector have struggled the most over the last five years, with only 47.3 per cent of funds outperforming the MSCI Emerging Markets index.
Adrian Lowcock, investment director at Architas, said this is unsurprising and that there are likely to be several factors at play.
“You essentially get some excellent active managers at the top end and then a bit of a mixed bag at the bottom end,” he said.
“I think a lot of that is because emerging markets need to be looked at differently from other equity markets; you need a combination of the macro knowledge and strong stock-picking skills as well.
“In other areas of the market, you might have a pure stock picker or someone who is purely focused on macro, but here you need that combination.”
Not only this, Lowcock said managers have tended to act too aggressively within the emerging markets space and have often heavily backed volatile and unpredictable markets.
Funds in the sector to have achieved the strongest total returns over the last five years include Hermes Global Emerging Markets, Newton Global Emerging Markets and GAM Star Emerging Equity, all of which have outperformed the MSCI Emerging Markets index by at least 36 percentage points over this time frame.
Performance of funds vs index over 5yrs
Source: FE Analytics
Perhaps unsurprisingly, the IA North America sector is second-from-bottom when it comes to its percentage of active managers beating the index over the last five years.
Jason Hollands, managing director at Tilney Group, said a significant reason for this is that the US has experienced a prolonged and aggressive bull market since the aftermath of the financial crisis. He also said it is dominated by high-growth technology-driven stocks such as Facebook, Amazon, Netflix and Google.
“My view is that, where we are now, we think the US market looks expensive on most metrics,” he said.
“Therefore, would you want to be putting money into that market now as an index fund where you’re fully invested and will be fully exposed to some of those parts of the tech markets that look as though they have bubble-like characteristics?
“I think now might be a time when actually a more defensive approach might make sense. That could be through buying an active fund with more of a defensive approach or buying a tracker fund which is also defensive.”
In total, 48 out of 96 (or 50 per cent) of managers in the IA North America sector have managed to outperform the MSCI North America index over the last five years. The top overall performers have been Morgan Stanley US Growth, T. Rowe Price US Large Cap Growth Equity and Old Mutual North American Equity.
At the opposite end of the spectrum, the IA Asia Pacific Including Japan and IA Japanese Smaller Companies sectors have seen the highest percentages of active management outperformance over five years at 87.5 and 85.7 per cent respectively.
However, it should be noted that there are very few constituents of these sectors and results will therefore be more skewed by the individual performances of each fund.
“The size [of the sectors] will make a difference,” Lowcock said. “If you take Japanese smaller companies, when that market falls it’s a great place to be an active manager because not everything goes up in the same way.
“Also, it’s massively under-researched, which does mean that active managers can really add value.
“In terms of Asia Pacific Including Japan, that is probably more to do with active asset allocation and exposure to Japan which has done well.
“I think a lot of this could be stock-picking within both regions.”
Within the IA Japanese UK Smaller Companies sector, the standout performers over five years have been Baillie Gifford Japanese Smaller Companies, M&G Japan Smaller Companies and Invesco Perpetual Japanese Smaller Companies.
In the IA Asia Pacific including Japan sector, the five-year winners are Invesco Perpetual Pacific, JPM Pacific Equity and Smith & Williamson Far Eastern Income and Growth.
The sectors in third and fourth place for their percentage of outperforming active managers over five years are IA UK All Companies and IA UK Smaller Companies, with a respective 81.9 and 77.3 per cent beating the MSCI United Kingdom benchmark over the given time frame.
“The UK smaller companies space is an area where active managers do have a much better track record because it is an under-researched area of the market. It’s also about avoiding the landmines in small caps as much as it is identifying the really good stocks,” Hollands explained.
“In the UK generally, in fact, it has been a really strong run for small caps and a lot of genuinely active managers in the IA UK All Companies sector are much more weighted to small and mid caps. I think that is one of the factors coming through.”
In the smaller companies area of the market, Old Mutual UK Smaller Companies Focus, R&M UK Equity Smaller Companies and AXA Framlington UK Smaller Companies have taken the top spots for their five-year returns.
Performance of funds vs index over 5yrs
Source: FE Analytics
In the IA UK All Companies sector, the runaway winners over five years are Old Mutual UK Dynamic Equity, Old Mutual UK Mid Cap and Old Mutual Equity 1.