The assertion that active funds do better at beating markets in volatile times has not fared well in the recent sell-off. To take one analysis, investment platform AJ Bell recently noted that just 30 per cent of active open-ended funds from major equity sectors had beaten a passive alternative in the first half of 2022, with UK equity and emerging market funds doing especially poorly.
A granular take on the same issue is even more scathing about professional stockpickers. Columbia Threadneedle’s quarterly FundWatch report highlights funds in major Investment Association (IA) sectors that have delivered top quartile returns over three years to the end of a given period. The latest edition, which covers periods to the end of June, finds this consistency ratio to be in “stunningly low territory”, with the all-time low reached in the first quarter (Q1) being superseded by the latest figures.
Just 0.35 per cent of the sample body – or four of 1,153 funds – achieved this level of consistent outperformance, down from 0.45 per cent in Q1. The four funds, Quilter Investors Sterling Diversified Bond (GB00B758PM41), Matthews Asia Small Companies (LU0871674379), Luxembourg Selection Active Solar (LU2341110190) and Fidelity Japan (GB00B882N041), focus on very different parts of the investment universe. To make clear the magnitude of this record, the FundWatch report has been running since 2008.
Some might argue that now is the time to be buying beaten-up active funds rather than decrying their poor performance, but the results are nevertheless disheartening, even if we shift the goalposts somewhat. When the Columbia Threadneedle analysts lowered their hurdle rate and simply sought out funds with above-median returns in each of the past three 12-month periods to the relevant date, they encountered another “new low”, with just 58 of the 1,153 funds hitting this target versus 68 in Q1. That marks what the team dubs a "collapse" from 6.1 to 5 per cent.
On a more positive note, all 12 main IA sectors still included funds that met the less demanding above-median consistency hurdle. The IA UK Smaller Companies cohort scored best on this front, followed by IA Asia Pacific ex-Japan. The UK All Companies sector came out the worst here.
Are there any more significant silver linings for fans of active funds? One is the theory that consistent streaks of underperformance have withered away because investment teams are sticking to their guns rather than following market rotations. “It is testament perhaps to managers that they are holding their nerve and not trying to chase these very unusual markets,” the report notes. “Indeed, the only hiding place this year really has been cash – and that is far from the natural hiding place of most active managers who will be not fearful, but instead excited by the opportunity that this current turmoil can offer for the long-term investor (as opposed to trader).”
So perhaps fund teams are being consistent in one respect, by sticking to their style and process. That, if true, at least makes things easier for investors who are mulling the idea of buying the dip. It also means you can use different funds more reliably to diversify a portfolio when markets get rocky. But don't necessarily expect active funds to shine when the next ugly sell-off rears its head.
