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Active manager outperformance ‘plummeted in 2018’

Less than quarter of active equity funds beat benchmarks and just 16% of bond funds outperformed, according to Scope


David Robinson

Far fewer active fund managers outperformed their benchmarks last year compared to 2017, according to an analysis by Berlin-based ratings group Scope.

Less than a quarter of active equity funds beat benchmarks in 2018 and just 16% of bond funds outperformed.

Scope’s study covered almost 2,000 Ucits equity funds authorised for distribution in Germany, found that the proportion that outperformed their benchmark fell year-over-year by over half from 53% in 2017 to 24% last year.

German and Japan equities lead slump

‘Equity Germany’ suffered the largest decline; the ratio slumped YoY from 87% to 25%. ‘Equity Japan’ also fell sharply, from 74% to 15%, 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% 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% beat the MSCI World index in 2018, down from 56% in the previous year.

European and US discrepancy

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.

Only 16% of about 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% 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% beat the benchmark, down from 30% in 2017.

EM and Italian woes

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, Scope said.

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.