Outperformance by active fund managers plummets in 2018
Far fewer active fund managers outperformed their benchmarks in 2018, according to an analysis of 15 key equity and bond fund segments by Scope. In fact, under a quarter of active equity funds beat benchmarks in 2018 and just 16 per cent of bond funds outperformed.
Scope’s study, which covered nearly 2,000 equity funds (UCITS) authorised for distributing in Germany, found that the proportion that outperformed their benchmark fell year-over-year by over half from 53 per cent in 2017 to 24 per cent last year. All eight equity segments saw their ratios worsen from 2017 to 2018.
‘Equity Germany’ suffered the largest decline; the ratio slumped y-on-y from 87 per cent to 25 per cent. ‘Equity Japan’ also fell sharply, from 74 per cent to 15 per cent, pushing this segment to the lowest ratio among equity categories. Only one in seven of the 124 active Japan funds outperformed the MSCI Japan index in 2018. By contrast, ‘Equity Asia Pacific ex. Japan’ achieved the highest ratio, with 37 per cent of the 59 active funds beating the index.
The ‘Equity World’ segment, the biggest in the study with over 700 funds, also suffered a sharp fall in their outperformance ratio: only around 22 per cent beat the MSCI World index in 2018, down from 56 per cent in the previous year.
Global equity funds were affected by the discrepancy between European and American equities, which was extreme by historical standards. Many equity funds were overweight Europe and underweight the US in 2018, which had a negative impact on performance. Moreover, numerous fund managers in Europe and Germany had high weights on cyclical export firms and were hit when the trade war escalated. Many fund managers were similarly overweight German small- and mid-caps, which had a disproportionately strong correction relative to blue chips, especially in the second half of 2018.
A mere 16 per cent of roughly 1,000 bond funds analysed outperformed their benchmarks in 2018, down from half in 2017. ‘Bond EURO Corp. High Yield’ achieved the highest ratio in 2018, with 29 per cent of its 76 funds beating the benchmark. This was also the only peer group in the study whose ratio improved from 2017. The lowest ratio was for ‘Bond European Currencies’: only 7 per cent beat the benchmark, down from 30 per cent in 2017.
For bond funds, the long-standing boom in emerging markets came to an end last year. Many fund managers were overweight EM, partly lured by positive spreads, and were caught on the wrong foot as a result. Additionally, high exposure to Italian bonds contributed to under-performance as Italian bonds came under severe pressure over the budget dispute with the EU. Even funds that counted on a narrowing of the record-high gap between US and German government bond yields saw losses.