Active fund managers all over the world have been struggling to outperform their benchmarks for a very long time. But which country has the managers with the best performance? In this video, Benedek Vörös of S&P Dow Jones Indices explores the data and asks whether there really are exceptionally talented managers to be found, and, if so, where they are most likely to be.
TRANSCRIPT
Robin Powell: We often hear that active fund managers perform best in volatile and declining markets. But the evidence shows us it isn’t true. Take the first half of 2022 for example — a bad six months for stock markets everywhere. SPIVA, a twice-yearly scorecard produced by S&P Dow Jones Indices, revealed that, across Europe, the chance of outperformance was similar to a coin flip.
Benedek Vörös: For example, in Germany, German equity funds had an underperformance rate of 55%, UK small-cap managers had an underperformance rate of 57%, and managers of Eurozone equity funds had an underperformance rate of 58%. But the single percentage, or the single number, that we found most stunning was the underperformance rate of UK large- and mid-cap managers, who had an underperformance rate of 96% in the first half of 2022.
RP: What’s really interesting about that dreadful performance is that it’s sometimes suggested that UK large- and mid-cap managers DO have exceptional skill. In the years immediately prior to that, they HAD performed reasonably well. But what the SPIVA analysis shows is that relative success is likely explained, not by skill, but by systematic exposure to small-cap stocks, which fell out of favour in 2021.
BV: What we observed is that UK large-cap managers tend to outperform the benchmark and small-cap in the UK have been doing better than large-caps, and what happened over the 12-month period ending June 2022 is that UK large-cap companies, for a variety of reasons, performed much, much better – like over 20% better – than UK small-caps and, resultantly or concurrently, UK large-cap managers had the worst underperformance rate since the start of the SPIVA reports in 2014.
RP: What those UK managers were doing is referred to as style drift — in other words, investing in areas outside a fund’s stated investment style. There’s nothing wrong with large-cap managers investing in small-caps. But they need to rotate back to large-caps before small-caps underperformed, which those managers clearly didn’t. In short, says Benedek Vörös, it’s a myth that British fund managers are exceptionally talented.
BV: The hard data tells us that it is not true! This ten-year underperformance rate for active large-cap UK managers was 72%, which is better than in many other regions over the same horizon, but still says that three out of four active managers do underperform their benchmark over ten years.
RP: The lesson is simple. Wherever you are in the world, picking an active fund, in advance, that will outperform the market in the long term is extremely difficult. Your chances of success are very slim.
ALSO IN THIS SERIES
When markets fall, resist the urge to act
During bear markets, it pays to sit tight
Do active fund managers add value?
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