Where Do Active Managers Outperform?

Morningstar Active/Passive Barometer reveals that the UK is a stock pickers market, but you're better tracking the index in the US

Annalisa Esposito 11 September, 2019 | 12:01PM
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Investors may be wrong to avoid UK funds, according to the latest Morningstar Active vs Passive Barometer. The report shows that the UK is a stock picker’s market, with active funds regularly able to beat the market.

The Barometer analyses the performance of active and passive funds to determine how successful fund managers are at beating the benchmark. The “success rate” indicates the proportion of funds in Morningstar category which have beaten the average return delivered by passive funds operating in the same sector.

Dimitar Boyadzhiev, passive strategies analyst at Morningstar, says: “While past performance is no guarantee of future returns, the Barometer is a useful measuring stick that can help investors better determine the odds of succeeding with active funds in different areas.”

Over the past 10 years, an impressive 77.8% of UK Mid Cap Equity funds have beaten the average passive return, and 33% of UK Large Cap Equity funds. The high success rates over the long-term show that investors who have been shunning UK equity funds in recent months because of Brexit woes and concerns about the economy may do better to back active managers in the region.

That may come as a surprise to many investors who have been turning away from the UK – according to Morningstar data, investors pulled £1.3 billion out of UK equity funds in July alone.

But the high success rate of fund managers is not true of all regions. A miserly 1.5% of funds investing in US Large Cap Growth stocks managed to beat the index over the past 10 years. The US stock market is a notoriously difficult one for fund managers to beat because it so broad, and the Morningstar Barometer shows that investors need to be choosy when deciding in which regions they should employ the skills of an active manager and where they would be better of simply tracking the stock market.

Fund Category Success Rates

success rate

Other regions where active managers have a high success rate include Global Emerging Markets, Latin America and Japan Small and Mid-Caps, where 35.5%, 31.4% and 36.4% of funds respectively beat their passive counterparts over a 10-year period.

Size Matters

The disparity in performance across the market capitalisation spectrum is interesting to note. Funds focused on large cap equities, regardless of region, have tended to have a lower success rate than those focusing on small and medium-sized businesses.

This is likely because large-cap markets are incredibly efficient, and it is difficult for investors to gain an information edge in such a well-researched space. At the small cap end of the spectrum, however, there are many more companies, a good proportion of which are not closely followed by analysts, allowing managers the opportunity to unearth hidden gems.

The success rate of UK mid-cap funds was more than double that of UK large-cap funds, for example, and in the US, some 27.5% of small cap equity funds were able to beat the market compared with the far lower success rates of large-cap focused funds. In Japan, just 16.9% of large-cap funds beat the average passive alternative – while small and mid-cap funds were able to outperform 36.4% of the time.  

Boyadzhiev says: “A high success rate for active funds means that there is a greater chance of selecting an active manager who can outperform the market. The UK mid-cap space, three out of four active funds have outperformed, looks like an obvious choice for opting for an active manager at the moment.”

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

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About Author

Annalisa Esposito  is a data journalist for Morningstar.co.uk