96% of UK active fund managers of large and mid-price equities underperformed their benchmark over the first half of this year according to the latest data.
This is despite the UK large and mid-price equity sector being one of the best places to invest over the same period, outperforming the US and Europe.
In fact, the performance of these UK active fund managers was even worse over the last 12 months up until the end of June 2022 with 98% of managers underperforming.
“The highest underperformance rate for a 12-month period since SPIVA Europe records began”
When seeking regulatory authorisation, every investment fund manager must choose a sector where they wish to invest.
They will need to stick to this sector although active fund managers will have discretion as to which stocks they pick.
A benchmark (also known as an index or indices) is a way of tracking all of the stocks that form part of a particular sector.
The aim of an active manager is to beat their respective benchmark, otherwise known as ‘beating the market’.
The S&P Dow Jones Indices are leading benchmarks and the S&P Indices Versus Active Funds (SPIVA) scorecard is produced on a regular basis to track the performance of active fund managers.
The latest report states that underperformance of UK large and mid-price equity active managers over the last 12 months is “the highest underperformance rate for a 12-month period since SPIVA Europe records began.”
In the wrong place at the wrong time
Over the last few years smaller stocks have outperformed larger stocks.
More recently, with the general economic outlook looking more gloomy, investors have moved out of smaller volatile companies into larger more established companies with more predictable revenue.
It appears UK active fund managers have been too slow to re-act with the latest SPIVA scorecard stating that “there has been a strong relationship between the 12-month relative returns of larger U.K. stocks versus smaller U.K. stocks, and the 12M underperformance rate of funds in the U.K. Large-/Mid-Cap Equity category.”
Basically, active managers have re-adjusted their portfolios to hold more smaller stocks as these were doing well and then failed to predict that larger stocks would take over and do better.
Why do active managers underperform?
The problem for active fund managers is that they need to make the right calls more often than not.
Every time a stock is traded there is a buyer and seller. So one side of the party believes the right decision is to sell and one believes it’s right to buy. There can only be one winner.
As shown recently, large stocks have outperformed small stocks, but it wasn’t easy to predict this in advance. It’s like predicting the future.
The other problem for active fund managers is that all their extra research costs money and this charge is passed onto investors.
Even when active managers do outperform their benchmark, by the time their fee is taken off they could be underperforming the benchmark.
An alternative approach to investing is to pick index funds.
Index fund managers won’t try to beat the market, they just buy the whole market and charge a lot less for doing so.
At least this way you know what you are getting and you don’t need to worry about your fund manager trying to make the right calls every time.
Here at RTS Financial Planning we run our own investment model portfolios and use an evidence based approach to ensure our clients get value for money.
If you would like us to review your investment portfolio then please get in touch for a free no obligation 15-minute call. We have carried out hundreds of investment reviews for our clients and have created many happy retirements. This could be you too!
Stock market linked investments and any income from them, can fall as well as rise and is not guaranteed. Any figures quoted are for illustrative purposes and should not be taken as a forecast or guarantee. Past performance should not be seen as an indication of future returns and clients may get back less than they have invested.