Mutual funds

Volatile market penalises active management

Posted by MoneyController on 04.08.2022

AJ Bell compared the performance of certain categories of active funds with that of the corresponding market indices (benchmarks). The result was that, despite fluctuating market conditions, active management in most cases failed to beat those indices. Sally Hickey writes about this in 'FT Adviser'.

Active funds suffer from volatile market

As AJ Bell's chief investment analyst Laith Khalaf points out, a volatile market situation should favour active management over passive management (ETFs), since it is possible to change the trajectory of the investment. Instead, according to AJ Bell's data, only 30 per cent of actively managed funds have managed to beat their benchmark indices. Last year, in a rising market condition, that percentage was 34%.

When the active strategy fails to beat the benchmark

Of the active funds analysed, the most disappointing were those in the 'All UK Companies' and 'Global Emerging Markets' investment categories: only 12% and 21% managed to do better (last year the figures were significantly different: 41% and 50%). Khalaf focuses on the strategy adopted by the UK fund managers. Those managers were more exposed to mid- and small-caps, which suffered from the difficulties experienced by growth stocks. And so, the FTSE 100 took advantage of its greater exposure to large-caps, losing only 1 per cent, compared to the average losses of active funds of 13.5 per cent.

Active management pays off more in the medium to long term

It must be remembered, however, as Khalaf points out, that if we look at performance over the past ten years, active funds have gained a lot of ground, beating the benchmark in 45% of cases. As Khalaf points out, however, the so-called 'survivorship bias' must be taken into account, since funds that make considerable losses in the long run are either closed or merged with other funds. The performance of ten-year active funds, moreover, varies considerably on the basis of the investment category: in the case of the 'All UK Companies' category, the success rate rises to 63%. In the case of the 'North America' category, on the other hand, it drops from 40% in 2022 to 28% for ten-year funds.

Read also:

A mutual fund – What is it?

What are the main management styles with regard to the benchmark?

What are ETFs and how do they work?

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