by Jake Moeller.
In 2018, the Pan-European mutual fund industry suffered its first annual outflow in six years, haemorrhaging some €129.2 billion. Performance-wise, the story was similarly dire—the Lipper Global Equity U.S. classification returned -6.3%, Lipper Global Equity Europe ex-U.K. returned -13.0%, and Lipper Global Equity U.K. returned -11.0% (all in GBP).
Exhibit 1. Pan-European Fund Flows (in € billion)
Active fund managers in aggregate did not cover themselves in glory in 2018, with only a small percentage of funds within major Lipper classifications beating the best-performing tracker fund in those respective classifications.
Lipper data reveals that fund flows have not reversed their medium-term trend, with estimated net outflows of €58.3 billion for the quarter.
From a performance perspective, however, the markets have been considerably buoyant, with the Lipper Global Equity Europe ex-U.K. classification returning 7.03% for the quarter, Lipper Global Equity U.K. returning 8.87%, and Lipper Global Equity U.S. returning 10.79% (all in GBP).
In terms of relative performance, for 2018 passive vehicles secured a comprehensive victory over their active counterparts. Q1 2019, however, has seen a marked improvement in active-fund relative performance against passive peers.
Exhibit 2. U.K. Performance
Looking at the graph on the left of Exhibit 2, only 8% of active funds in the Lipper Global Equity U.K classification beat the highest ranked broad-based tracker fund in this classification in 2018. However, this figure has more than tripled in Q1 2019, with 29% of active funds beating the highest-ranked tracker peer.
Exhibit 3. Europe ex-U.K. Performance
Looking at the graph on the left of Exhibit 3, only 14% of active funds in the Lipper Global Equity Europe ex-U.K. classification beat the highest ranked broad-based tracker fund in this classification in 2018. This figure has improved to 22% in this classification for Q1 2019.
Exhibit 4. U.S. Performance
Looking at the graph on the left of Exhibit 4, in perhaps the most difficult classification to outperform—the Lipper Global Equity U.S. classification—24% of active funds beat the highest ranked broad-based tracker fund in 2018. This has improved marginally, to 28%, for Q1 2019.
When it comes to performance comparisons, it is important to consider the “opportunity cost” of investing in a passive vehicle (i.e., the potential outperformance of an active fund over a passive peer). This is clearly seen by observing the bar charts to the right of each of the above exhibits.
For example, in Q1 2019, the best-performing active fund in the Lipper Global Equity U.K. classification outperformed the best-performing tracker peer by 7.4 percentage points. In the Lipper Global Equity Europe ex-U.K. classification, this difference was 5.7 percentage points and for the Lipper Global Equity U.S. classification, it was 7.4 percentage points.
The longer-term compounding effects of these differences are even more evident when comparing the performance of active over three and five years.
The thesis is that, typically, late-cycle environments precede a rotation out of momentum-biased ETFs and the increasingly expensive large-cap stocks in which they invest, providing fertile ground for active stock pickers.
However, quantitative measures have been distorting the market cycle considerably. Judging where we are in a “normal” market cycle is more art than science, and the complexity today is incalculable.
It is impossible to draw too many inferences into three-month data and there is little comfort overall in the recent market for acolytes of the active-fund management industry. However, if the relative performance trend of Q1 2019 can continue, the story may be very different by year end.
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