More than half of actively-managed UK equity funds failed to beat a comparable benchmark over one year, according to data from S&P Dow Jones Indices, with a surprising decline in the number of small-cap funds outperforming.
The latest S&P Indices Versus Active Funds (SPIVA) Europe Scorecard found that just 48.99 per cent of active UK equity funds outperformed the S&P United Kingdom BMI benchmark for the year to 30 June.
Indeed, as the below chart shows, the average IA UK All Companies sector fund only just managed to outperform the FTSE All Share index.
Performance of sector vs index over period
Source: FE Analytics
There was a slight decline in the proportion of UK large- and mid-cap equity funds outperforming the index, where 60.33 per cent failed to outperform the S&P United Kingdom LargeMid Cap index, compared with 54.1 per cent in 2017.
More surprisingly the proportion of UK small-cap funds that underperformed the benchmark also rose, although it remains one of the better areas for outperforming strategies.
The percentage of UK small-cap funds underperforming the S&P United Kingdom SmallCap index increased from 19.7 per cent to 35.29 per cent over six months.
However, there were similar rises in underperforming funds for sterling-denominated funds focused on other geographies.
One of the biggest rises in the percentage of underperforming funds was found in the global equity sector, where 71.93 per cent of funds failed to beat the S&P Global 1200 index over one year, compared with 52.72 per cent six months earlier.
The worst sector for active equity underperformance over the 12-month period was emerging markets, where 73.17 per cent failed to beat the S&P/ICFI benchmark, up from 62.43 per cent.
“The desynchronization of global growth and central banks’ policies hindered emerging markets,” the report’s authors noted.
“Active funds investing in these regions from within Europe generally did not find stockpicking to be advantageous.
“Rising geopolitical risk, oil prices, trade tariffs, and a general strengthening of the US dollar in the first half of 2018 weighed least favourably on emerging markets’ growth expectations.”
There was also a small rise in the percentage of Europe ex-UK active strategies, as 57.04 per cent failed to outperform the S&P Europe ex-UK BMI index compared with 56.15 per cent six months earlier.
Despite greater underperformance of indices recorded in the latest SPIVA Scorecard, there was one area of improvement in US equity strategies.
The percentage of active US equity funds underperforming the S&P 500 index over one year fell from 67.11 per cent at the end of 2017 to 58.26 per cent at 30 June.
Performance of sector vs index over period
Source: FE Analytics
During the 12 months to 30 June 2018, the average IA North America fund delivered a 12 per cent total return compared with a 11.87 per cent gain for the S&P 500 index – in sterling terms.
As well as UK small-caps, investors in Spanish, Swiss and Swedish equities would also have had a better chance in picking an outperforming strategy over one year as more than half of funds outperformed their respective benchmarks.
The best performing sector over the 12-month period was the UK small-cap equity sector with a total return of 15.72 per cent, compared with a 12.72 per cent gain for its benchmark.
Double-digit returns were also recorded by the US equity sector where the average sterling-denominated fund delivered a 12.98 per cent total return compared with a gain of 12.53 per cent for the S&P 500 index.
The worst performance by a sector over one year was recorded by the average Europe ex UK fund with a 3.75 per cent total return, compared with a 3.52 per cent gain for the S&P Europe Ex-UK BMI index.
“The S&P 500 outperformed many European benchmark indices; up 11.7 per cent in euro terms over the one-year period ending in June 2018,” the report’s authors highlighted.
“US tax cuts and fiscal stimulus supported a wide earnings gap for US corporates over Europe and elsewhere.”
For long-term investors, finding outperforming active strategies is challenging as most sectors have failed to beat their benchmark.
The best performing sterling-denominated sector is UK large- and mid-cap equities where 27.13 per cent of funds have outperformed the sector over the decade.
More broadly, 25.33 per cent of UK equity funds have outperformed the benchmark, while 23.65 per cent of active Europe ex UK strategies have outperformed the benchmark.
The worst sector for long-term outperformance is global equities where just 5.56 per cent of active strategies have outperformed the S&P Global 1200 index, while just 6.11 per cent of active US strategies have beaten the S&P 500.
Over the past decade the US equity sector has been the best performing active on average, with an annualised return of 12.66 per cent, although this is behind the S&P 500 index’s 14.78 per cent.
Annualised performance of sector vs index over 10yrs
Source: FE Analytics
The average UK small-cap equity fund has also delivered double-digit annualised returns of 12.43 per cent over the past decade compared with the S&P United Kingdom SmallCap index.
The worst active sector for returns over 10 years to 30 June 2018 was emerging markets equity, delivering a 7.09 per cent annualised total return over the period compared with a 7.5 per cent gain for the S&P/IFCI index.