Why Active Funds Have Recently Outperformed Passive

Although there are periods where active equity managers have outperformed on average, periods of outperformance have tended to be cyclical

Vanguard Asset Management 31 May, 2016 | 2:57PM
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Morningstar's "Perspectives" series features investment insights from third-party contributors. Here, Todd Schlanger, Vanguard’s investment strategist, investigates why and how active funds outperform passive ones.

Recent data suggests that UK active equity managers have turned a corner, following years when the majority of active funds underperformed their benchmarks. Indeed, according to data from Morningstar over the three-year period ending December 31 2015, more than half of UK active equity funds outperformed the FTSE All-Share Index. 

So Why the Outperformance?

Some have argued that the recent bear market in equities has helped active funds to outperform. There is a common perception that actively managed equity funds will outperform their benchmark in a bear market because, in theory, active managers can move into cash or rotate into defensive securities. In reality, the probability that these managers will move fund assets to defensive stocks or cash at just the right time is low. Most events that result in major changes in market direction are unanticipated.

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Vanguard Asset Management  is a wholly owned subsidiary of The Vanguard Group Inc., whose mission is to help clients achieve their goals by being one of the world's highest value providers of investment products and services.