The analysis of the number of actively managed mutual funds and ETFs which were able to outperform their respective fund manager benchmarks depends on various factors. One of these factors is the market, which is chosen for the analysis, since some markets are considered as very efficient, hence it might be hard for active managers to generate an outperformance compared to their fund manager benchmarks after costs. A classification which is seen as natural habitat for active management is Equity Emerging Markets Global since emerging markets are considered in general as not efficient as developed markets like the U.S. stock market.
Therefore, it makes sense to review the actively managed mutual funds and ETFs in this classification to see if the respective managers are able to take profit from the inefficiencies in these markets and outperform their fund manager benchmarks. Even as it is clear that not all fund managers will beat their benchmarks even in inefficient markets, if the assumption above is true there should be a high number of active managers of global emerging markets equity funds who outperform their respective fund manager benchmark. In addition, one would expect to see a clear pattern of an increasing number of products which outperform their benchmarks the longer the analyzed time periods become.
Introduction
All investors know or at least should know that the past performance of a mutual fund is no indicator of future performance. But the past relative performance of an actively managed mutual fund or ETF compared to its fund manager benchmark shows if the respective fund manager was able to fulfill the marketing promise of an outperformance compared to the fund manager benchmark. This means such an analysis verifies if the fund was worth the higher fees for active management or if the investor would have been better off by simply buying the benchmark via a passive product such as an ETF.
The analysis of the performance of a fund or ETF leads naturally to a discussion around which time period might be appropriate for the analysis. Some investors want to invest in funds which are able to beat their benchmark year after year, while others might want an outperformance after three, five, or even 10 years.
As we are agnostic to the time periods, we analyzed all one-year, three-year, and five-year periods, as well as the overall 10-year period in this study.
Methodology
To evaluate if actively managed equity emerging markets global funds are delivering a value added for investors, we calculated the relative performance of the funds to their respective fund manager benchmark. This approach ensures that we compared the performance of the fund with the performance target stated in the fund documents. Unfortunately, this approach does have a negative impact on the size of the peer group, since not all funds—especially outside the EU—provide a fund manager benchmark. In addition to this, not all fund manager benchmarks are available within the Lipper database.
The peer group for this study was built by choosing the primary share class (the portfolio) of all actively managed mutual funds and ETFs within the Lipper Global Classification Equity Emerging Markets Global, which have been launched before January 1, 2013. In addition, the asset status had to be active on June 1, 2023. This screen led to the so-called survivorship bias, as those funds which had been closed within the 10 years period between April 1, 2013, and March 31, 2023, are not reflected within the statistics of this study. This means that it is likely that this study is overstating the percentage of funds which were able to outperform their fund manager benchmark since it seems to be a valid assumption to state that successful funds won’t get closed by fund promoters. These filters brought the number of constituents to 568 funds. The availability of the respective fund manager benchmark brought the size of the peer group to 364 funds.
We calculated the relative performance of the funds versus their fund manager benchmarks for all one-year, three-year, and five-year periods starting at January 1 of each year, as well as the 10-year period from April 1, 2013, to March 31, 2023. All calculations were made in EUR.
More generally, it is somewhat fair to say that this study covers all actively managed funds globally which are listed as Equity Emerging Markets Global in the Lipper database and which have been launched before January 1, 2013, even as the availability of the respective fund manager benchmark reduced the number of funds within the analysed universe significantly (from n= 568 to n=364).
Analysis of One-Year Periods
Normally one would say that a view of the one-year period is too short for the evaluation of equity funds as there are too many external factors which can impact the performance of the fund or the fund manager benchmark in one way or the other.
Nevertheless, some investors would like to see their fund outperforming its fund manager benchmark every single year, as this is the ultimate goal for an actively managed fund.
155 funds beat their fund manager benchmark on average every year, while the actual number varies between 99 and 227 funds as shown in graph 1.
More general speaking, the number of outperforming funds in every period lead in combination with the number of funds which were able to outperform their benchmark period after period to the assumption that the outperformance within the single periods is rather a random walk than based on the skills of the fund managers.
That said, no fund was able to beat its fund manager benchmark in every year of the analyzed time period.
Graph 1: Number of Outperforming Funds (April 1, 2013 – March 31, 2023)
Source: Refinitiv Lipper
As mentioned above, the one-year period is too short to evaluate if an actively managed fund can add value for investors since single market events or style drifts can have a massive impact on the performance of the fund and/or the fund manager benchmark and can favor one or the other.
Nevertheless, it is surprising that not a single fund was able to beat its fund manager benchmark year after year over the analysed 10-year period since Equity Emerging Markets are considered as a sector where active managers should be able to deliver an outperformance.
Analysis of Three-Year Periods
Even as three years seem to be a relatively short time period to evaluate the performance of equity funds, it is a time period which is used by professional investors and fund selectors.
134 funds were able to beat their fund manager benchmark on average over the three-year periods analyzed in graph 2, while the actual number of funds varies between 89 and 159 funds.
As the time periods get longer, it is not surprising that the number of funds which beat their respective fund manager benchmark over every time period is increasing. Nevertheless, only nine funds were able to beat their fund manager benchmark over every three-year period.
Graph 2: Number of Outperforming Funds (April 1, 2013 – March 31, 2023)
Source: Refinitiv Lipper
Analysis of Five-Year Periods
The five-year period seems to be long enough to evaluate the performance of equity funds, as this time period allows the fund manager to adjust the portfolio to changing market conditions and/or style drifts. It also allows the fund manager to gain back performance in case of an underperformance in single years of the evaluation period. As said before, it is not surprising that the number of funds which can beat their fund manager benchmark goes up, the longer the respective time period gets.
In more detail, 113 funds were able to beat their fund manager benchmark on average over the five-year periods analyzed in graph 3, while the actual number of funds varies between 97 and 144 funds.
That said, it is surprising that on average less funds show an average outperformance over the five-year period (113) than over the three-year period (134).
Nevertheless, 21 funds were able to beat their fund manager benchmark over every five-year period.
Graph 3: Number of Outperforming Funds (April 1, 2013 – March 31, 2023)
Source: Refinitiv Lipper
Summary
The results of this study showcase that it is very hard for fund selectors and especially retail investors to find a global emerging markets equity fund which will be able to beat its fund manager benchmark over various time periods. This performance pattern might be one reason why passive investment products such as ETFs or index tracking mutual funds are increasingly becoming the instruments of choice for professional, as well as retail investors.
Nevertheless, there were 103 actively managed mutual funds and ETFs (or 28.30% of the analyzed funds) which have beaten their respective fund manager benchmark over the 10-year period. This result is surprising, as it means that average number of funds who are outperforming their respective fund manager benchmark is higher in shorter time periods than in longer ones.
In more detail, while 103 funds or 28.30% of the analyzed peer group were able to outperform their fund manager benchmark over the 10-years period, 113 funds (31,14%) were able to do this on average over the five-year period. 134 funds (36.68%) beat on average their fund manager benchmark over the three-year period and 155 funds (42.69%) outperformed on average over the one-year period.
That said, at least the number of products which were able to beat their fund manager benchmarks over all analyzed time periods increased the longer the respective time periods become. While no fund was able to beat its fund manager benchmark year after year over the analyzed time period, there were nine funds who were able to outperform their fund manager benchmarks over all three-year periods and 21 funds which beat their fund manager benchmark over all five-year periods. In addition, there were 103 funds which outperformed their fund manager benchmarks over the 10-year period.
As mentioned before, the results lead to the impression that (out)performance of active managed equity emerging markets global mutual funds and ETFs rather follows a random walk. Otherwise, the results should show that the number of outperforming funds is increasing the longer the analyzed time periods get, since longer time periods should enable active managers to adjust their portfolios to changing market trends. In addition to this, longer time periods should give active managers the chance to catch up with the index performance in cases when their investment style did not match the underlying market trends.
With regards to the above, it seems to be a difficult task for investors to find an actively managed product in the classification Equity Emerging Markets Global that outperforms its benchmark over medium- and long-term time horizons.
That said, it seems to be a superior investment strategy to choose a passive product when investing in emerging markets equities globally, even though these markets are seen as less efficient and therefore a natural habitat for active managers who can profit from market inefficiencies.
Nevertheless, this analysis covers only one ten-year period, and a prolonged analysis may lead to different results. In addition, the exclusion of funds which have been launched during the analyzed period may have a negative impact on the results, since younger funds may use modern portfolio management techniques to enhance their performance. But this would mean that one would need to add also closed and merged funds to this comparison, and it is unclear if the possible positive effect from the younger funds would be able to offset the negative effect from the closed and merged funds, since fund promoters do rarely close funds which are regularly outperforming their benchmarks and have therefore the potential to gather significant new assets.
This article is for information purposes only and does not constitute any investment advice. Investors should consult their investment advisor and/or the fund documents before making any investment decision.
The views expressed are the views of the author, not necessarily those of Refinitiv Lipper or LSEG.
