by Jake Moeller.
To Q3 2019 there remains a turnaround (for both the active and the passive industry) from the poor 2018 it endured with pan-European net inflows of €200 billion. Performance data also remain supportive. To Q3 2019, the Lipper Global Equities ex UK classification has returned 20.1%, Lipper UK Equities 13.4%, and Lipper US Equities 22.4% (all in GBP).
Active funds in the Lipper UK classification, have begun to show signs of improving performance relative to their passive peers after a sustained period of relative underperformance. Where there had been signs of similar improvement across the board to 1H 2019, active funds in the US and Europe classifications have struggled in Q3.
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%, for 1H 2019, 40% and to Q3 2019, this figure now stands at 52%.
Figure 1. UK Performance
Active funds in the Lipper Europe ex UK equity classification have not fared as well. 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, 26%. To the end of Q3 2019, active funds have fallen back to only 19% outperforming.
Figure 2. Europe ex-UK Performance
Active funds in the Lipper US equity classification have also retreated. 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, 30%. To the end of Q3 2019 the figure has fallen back to 19% – perhaps confirming the commonly held thesis that the US market is the hardest to beat.
Figure 3. US Performance
Advocates of passive investing will not feel threatened by these short-term numbers and other than the UK classification where active funds have managed to move to a 52% outperformance metric, fund managers in Europe and the US classifications have failed to consolidate improvements made to 1H 2019.
The “opportunity cost” of not investing in an active fund (i.e., missing out on alpha) can still be material, especially over longer periods of time. In this limited study, over the YTD Q3 2019, there has been some convergence. Even the best performing active funds in each classification may not be significantly impressive over the highest performing tracker fund, to convince passive advocates.
The blue bars in each of the graphs on the right-hand side reveal this. To Q3 2019, the best-performing active fund in the Lipper UK Equities classification outperformed the highest-ranking broad-based tracker by 7.5% percentage points.
In the Europe ex UK classification, over the same six-month period, that figure is 6.8% and for US equities, 8.8% points—respectable perhaps, but hardly stellar.
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.
There was a marked improvement for active funds to 1H 2019 but save for the Lipper UK classification which has continued to strengthen, other classifications have retreated in Q3.
Like many active fund advocates, I have long-held belief that we may be entering a period in the market cycle which is more conducive for active funds in aggregate. Although I will concede that holding my nerve is becoming more difficult!
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