Almost nine in 10 active equity funds under-performed in 2016

Almost nine in 10 UK actively managed funds (87 per cent) underperformed their benchmark in 2016, according to S&P Dow Jones Indices, the index provider. 

Fund managers were wrong-footed by the Brexit vote and Donald Trump’s election victory. The outcomes of both were unexpected, as were the reactions of financial markets. 

Caught out by Brexit vote and Trump Victory

In the case of Brexit the UK stock market suffered an initial two-day hangover, but then moved higher – taking passive funds that simply track the FTSE indices higher with them. 

At the start of 2017 the UK’s leading index, the FTSE 100, powered to a record high and has since managed to maintain its momentum: at the time of writing (11.30 on 4 April) the index was sitting just above 7,300. On 24 June, the day the Brexit vote was announced, the FTSE 100 stood at around 6,000, so it has gained almost 18 per cent since that date. 

Last November, fears that a Trump victory would trigger a market correction proved to be completely unfounded. Both the UK stock market and the US exchanges maintained their form, with the two main US market indices, the S&P 500 and Dow Jones, hitting record highs.

In rising markets it becomes much harder for actively managed funds – particularly those run by stock-pickers and diverging significantly from the market – to keep pace. 

Funds that have the specific aim of trying to achieve positive returns in all market conditions also endured a tough 2016.

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Research by Money Observer in January found that out of 93 funds in the Investment Association’s targeted absolute return (TAR) sector 30 lost money. Moreover, 49 per cent of TAR funds failed to produce returns that kept pace with consumer price inflation

- How to inflation-proof your portfolio

Fund managers lagged behind after Brexit

Adrian Lowcock of Architas, which runs a suite of multi-asset funds, says absolute return fund managers were 'completely wrong-footed in 2016'. He explains: 'At the start of 2016, opinion polls indicated that there was a 30 per cent chance of the UK voting to leave the EU.

'As a result, absolute return funds were too positively positioned leading up to the referendum. Then, when a short-term sell-off occurred after the Brexit result, managers quickly took risk off the table, thereby lagging the market's subsequent strong recovery.'

Longer term performance numbers

In 2015, UK active fund managers had a much better year as just 22.2 per cent underperformed. Over three years to the end of 2016, 62 per cent of funds underperformed, 50 per cent over five years and 74 per cent over 10. 

One of the biggest challenges a do-it-yourself investor faces is finding the cream of the crop among the thousands of funds all aiming to do the same thing – beat the market and their peers – as only a few will consistently be able to add significant value over long periods.

Damning studies from respected bodies, including the Pensions Institute at Cass Business School, conclude that investors are better off sticking to tracker funds, which simply aim to replicate the performance of a market index.

Active versus passive funds 

This, however, is not a view shared by Money Observer, which advocates mixing and matching between the two styles

In defence of active management, there are fund managers out there who over various market cycles have proved their worth by consistently gaining an edge over both the relevant index and active fund manager rivals.

The trouble is that there are far more duds than gems, which makes finding a winner an uphill task. To help readers focus their sights on the superior options, Money Observer has created a shortlist of Rated Funds, which for 2017 features 198 investment trusts and funds.

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