Active Funds: Making Up Some Ground in 1H 2019

2018 was a difficult year for the European mutual fund industry– active and passive vehicles alike. The market witnessed poor performance across most asset classes and outflows of €129.2 billion. This constituted the first annual outflow in Europe after six consecutive years of net inflows.

For 1H 2019, there has been a turnaround with the industry enjoying net inflows of €41.3 billion and performance data improving.

Figure 1. Pan European Estimated Net Flows 2004 to 1H2019 (in € billion)

Source: Lipper by Refinitiv.

Over the same time period, the Lipper Global Equities ex UK classification has returned 14.3%, Lipper UK Equities 17.9%, and Lipper UK Equities 12.6% (in local currency).

Figure 2. Lipper Global Equity Fund Classifications 1H 2019 Performance (local currency)

Source: Lipper by Refinitiv. Lipper for Investment Management.

Active funds too, have begun to show signs of improving performance relative to their passive peers after a sustained period of relative underperformance.

UK equity performance

At the end of 2018, only 14% of active funds in the Lipper UK Equity classification had beaten the highest ranked broad-based tracker fund in the same classification for the 12 months.

For three months of Q1 2019, this figure had improved to 29% and for 1H 2019, the figure now stands at 40%.

Figure 3. UK Performance

Source: Lipper by Refinitiv, Lipper for Investment Management.

European – ex UK equity performance

At the end of 2018, only 13% of active funds in the Lipper European Equity classification had beaten the highest ranked broad-based tracker fund in the same classification for the 12 months.

For three months of Q1 2019, this figure had improved to 22% and for 1H 2019, the figure now stands at 26%.

Figure 4. Europe ex-UK Performance

Source: Lipper for Investment Management. Lipper for Investment Management.

US equity performance

At the end of 2018, 26% of active funds in the Lipper US equity classification had beaten the highest ranked broad-based tracker fund in the same classification for the 12 months.

For three months of Q1 2019, this figure had improved to 28% and for 1H 2019, the figure now stands at 30%.

Figure 4. US Performance

Source: Lipper for Investment Management. Lipper for Investment Management.

Longer periods improve the numbers, but not by much

Advocates of passive investing will not feel threatened by these short-term numbers, despite the improvement for 1H 2019.

If we look at the three and five-year data (to the end of 2018) on each of the above left-hand side graphs, in aggregate for each of the three classifications above, investors statistically had a better chance of outperforming if they had chosen a tracker fund.

Opportunity cost remains material

That is not to say those investors would be better off. When it comes to performance comparisons, it is important to consider the “opportunity cost” of not investing in an active fund (i.e., the potential outperformance of a fund over an index). Often this can be considerable.

The blue bars in each of the graphs on the right-hand side reveal this. For 1H 2019, the best-performing active fund in the Lipper UK Equities classification outperformed the highest-ranking broad-based tracker by 4.6% percentage points.

In the Europe ex UK classification, over the same six-month period, that figure is 20.5% and for US equities, 9.6% points—quite decent out-performance if indeed you were able to choose those winning funds in advance.

2019 – Improving fortunes for active?

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.

1H 2019 has shown a marked improvement in the relative performance of active funds against their passive peers. Although coming off a low base, perhaps there are signs that we are finally beginning to enter that period in which the market is more conducive for active funds in aggregate.

There is considerable noise in the market and judging where we are in the cycle is not easy. Active fund performance has a lot of ground to make up. It will be interesting to watch their fortunes throughout the rest of 2019.