Active funds fail to outperform passive rivals despite Covid-19 opportunity
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Actively managed funds failed to outstrip their passively managed counterparts in the wake of the turmoil sparked by the pandemic, despite many active managers touting the turbulence as an opportunity, according to new research.
Dimitar Boyadzhiev, passive strategies senior analyst at Morningstar, which conducted the research, said: “In theory, one often posited by active fund managers, the early 2020 volatility caused by the Covid-19 pandemic should have been a once-in-a-decade opportunity for them to deliver excess returns, shielding investors from a vicious drawdown in global markets.
“In practice, only about half of active stock funds and one-third of active fixed income funds bested their average passive peer during the first six months of 2020.”
The findings in Morningstar’s active/passive barometer update showed that only 43.8 per cent of active UK large-cap equity funds managed to outdo their passive counterparts in the first six months of the year, while the success rate over the period for active global emerging market equity funds stood at 41.8 per cent.
The poorer performance was not the same across the board — active European small-cap equity and large-cap equity funds were more likely to beat their passive peers in the first half of 2020, with success rates of 81.8 per cent and 62.8 per cent respectively, according to Morningstar.
Fixed income fared worst. Morningstar pointed out that “actively managed stock funds typically hold more cash than their passive peers, which served to cushion the double-digit drawdowns experienced in the first quarter of 2020, and partly explained these funds’ relatively higher success rates versus active fixed income funds”.
For example, only about 20 per cent of active funds in the euro-denominated corporate bond category and global bond category beat their passive competitors over the first six months of 2020.
Over the 10 years to the end of June 2020, for all categories of ETF, the actively managed European fund success rate in outperforming passive peers was less than 25 per cent in nearly two-thirds of the categories surveyed.
Morningstar’s active/passive barometer measures the performance of active funds against passive peers in their respective investment categories. The researchers evaluate active funds against a composite of passive funds, meaning the benchmark reflects the actual, net-of-fee performance of the passive funds available to investors.
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