Long-term persuasion battle: Active or passive approach?
In the dynamic world of investments, the first half of 2021 presented a mixed picture for actively managed equity funds. According to a recent analysis by Scope, only 39% of these funds managed to outperform their benchmark index, a drop of eight percentage points compared to the whole of 2020.
Stocks performed strongly in the first half of the year, but the rapid shift between investment styles, value and growth, in the overall market made it challenging for fund managers to outperform the benchmark index.
The analysis, which covered eight peer groups of equity funds, revealed that in the peer groups "Asia Pacific ex Japan Equities" and "North America Equities", more than half of the actively managed funds outperformed their benchmark index. On the other hand, the outperformance ratio in the peer groups "Japan Equities", "Europe Equities", "World Equities", and "Germany Equities" was lower than in 2020.
The poor performance of funds focused on Germany was attributed to a high proportion of mid- and small-caps, which underperformed compared to DAX stocks since the beginning of 2021. Interestingly, the value of mid- and small-caps in the benchmark (MSCI Germany) is only 10%.
Last year's favourites, such as Chinese stocks or tech stocks, have not yet been able to build on their success. Only "Emerging Markets Equities" and "Eurozone Equities" had some success, but they did not reach the 50% mark.
Looking at the long-term picture, the outlook for active fund managers is rather disappointing. Going back three years, only 27% of the 2,030 funds examined could outperform their benchmark index. This figure drops to 22% when we look at a five-year period, with only 443 funds managing to outperform.
Figure 2 shows the number of funds with outperformance over one, three, and five years. The data illustrates a clear decline in the number of funds outperforming their benchmark as the time horizon increases.
However, it's important to note that actively managed equity funds outperformed passive funds like ETFs or index funds in the first half of 2021. This could be a glimmer of hope for active fund managers in the coming months.
In conclusion, the outlook for active fund managers in 2021 has been mixed when it comes to outperformance ratios. The market's volatility and the shift in investment styles continue to pose challenges, but there are still opportunities for those who can navigate these complexities effectively.
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