Very few active funds outperform the stock market – you’re better off getting a low-cost passive fund, right? Wrong. At least, not when it comes to European equities. Schroders fund manager James Sym used Morningstar data to track the performance of active and passive funds within his European equities sector and found that higher-cost active funds persistently outperformed.
“There is a lot of data out there which seems to show that only a small number of actively managed funds beat their benchmark and that many investors are better off simply buying an ETF which tracks an index,” he said at the Schroders investor conference last week.
“That might be true for the US market, but for European equities that simply isn’t the case – even the average active fund outperforms the index. In fact, since 2002, looking at rolling five-year performance even those European equity funds which are below average in their peer group sector outperform the index tracker average. And this is after fees.”
Sym raised the question as to whether investors would buy an actively managed fund which had delivered less than average returns over 20 years – so why pick a passive fund which has done just that?
Don’t Think Short Term
As well as questioning the received wisdom that few actively managed funds beat ETFs, Sym encouraged investors not to be too short-termist when it comes to performance. Using Morningstar data he revealed that many of the long-term top performing funds had at least two successive years at the bottom of the pile.
“Three quarters of the most successful funds over a year period had two or more years of consecutive underperformance,” he said.
Even with these consecutive years of below-average performance, over the long term, the majority of active funds in the European equities sector still outperformed the average passive fund, post-fees. The percentage of active funds beating passive funds, on a five-year rolling basis, even reached as high as 75% at the beginning of this year – and has previously peaked at 85% in 2004.
This data suggests that binary factors proved not to have the biggest impact on long-term performance; active vs passive, best performers in one calendar year vs the worst. Instead, Sym referenced a Birkbeck University study which found that personality traits have the biggest impact on positive performance; fund managers who displayed intellectual curiosity were more likely to outperform those without that trait.
