Investors favour active funds over passive as markets plunge

A poll from Barclays Stockbrokers has revealed that 43 per cent of investors currently favour actively managed investment funds, compared to 20 per cent who say they prefer passive index-tracking funds.

The merits and drawbacks of active and passive investment strategies are frequently debated and compared, but conclusive evidence proving the superiority of one method over the other is lacking.

Typically, passive investment strategies tend to perform well in rising markets, matching or even surpassing active strategies. This is particularly the case in the main US market, where it is notoriously difficult for active managers to outperform blue-chip indices.

However in falling markets, active funds can have the advantage as good managers can theoretically reposition their portfolios to mitigate losses - by moving into cash or other lower-risk assets, for example.

STEEP MARKET DECLINES

This year has witnessed steep declines across global equity markets, with the UK's FTSE 100 index down more than 20 per cent from its recent peak in April 2015 to early February - a technical bear market. This may suggest why active management is currently favoured.

Commenting on the survey, Chris Stevenson, vice president at Barclays Stockbrokers, says: 'Whether investors have a preference for actively or passively managed funds, it is important that they recognise the significance of identifying their personal investment goals, such as saving for retirement, and align their investment strategy to that objective.

'It is paramount that investors do their research so they are fully aware of the risks associated with any investment and find the opportunities that best suit their investment needs.'

According to data from FE Analytics, a comparison of predominately active fund and global ETF sectors reveals that over one year active funds outperformed passive index-tracking ETFs in three out of five sectors, while over three years active funds outperformed in four out of five sectors.

Over one year to 22 February the Investment Association's UK all companies, Europe ex UK and Japan sectors (which are largely populated by actively managed funds) all outperformed their ETF sector counterparts by around 3 per cent.

The two predominately active sectors to underperform were global emerging markets, where active funds shed an average of 15.23 per cent compared to 15.19 per cent from Emerging Market ETFs, and North America, where active funds lost 3.4 per cent compared to a loss of 0.1 per cent from US ETFs (as is typical in the US).

Over three years North America was the only predominately active sector to underperform its ETF counterpart.

Performance of predominantly active fund sectors versus ETF sectors
SectorTotal return (%)
1 year3 year5 year
IA Japan-0.0124.225.28
Global ETF equity USA-0.0926.2749.92
IA Europe excluding UK-1.6418.2531.18
Global ETF equity Japan-2.9122.6424.2
IA North America-3.3936.2962.7
Global ETF equity Europe ex UK-4.315.896.42
IA UK all companies-5.8216.1834.16
Global ETF equity UK-8.283.8516.83
Global ETF equity emerging markets-15.19-19.56-16.41
IA Global emerging markets-15.23-17.72-11.73
Source: FE Analytics. All data to 22 February 2016

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