The average active fund has outperformed the average passive fund over the past 20 years in three out of the five Lipper Global sectors – the UK, Europe and Japan – according to new research from BMO Global Asset Management’s Multi-Manager team.
The team reviewed the performance of all active and passive funds for which Lipper data is available across the UK, Europe, Asia, US and Japan over a 20-year period. The research revealed that over a 20-year period the average active fund outperformed the average passive fund in the UK, Europe and Japan. The Global Emerging Markets and Sterling Corporate Bond sectors were excluded from the analysis as there were no passive funds on offer in these two sectors 20 years ago.
The scale of the outperformance of the best performing active fund versus the best performing passive fund was also notable in the PassiveWatch findings. In the US sector, for example, the best performing active fund outperformed the average passive fund by a multiple of 6.3x. In the UK it was 5.9x and in Asia it was 2.9x.
Rob Burdett, Co-Head of BMO Asset Management’s Multi-Manager team, commented: “This research highlights that there is alpha to be found in active, but also reinforces the importance of due diligence to identify the best active managers which can outperform passives significantly over the long-term. Choosing the right managers and exposures in passive is also imperative, and passives can play an important role in reducing overall cost and adding diversification. Over any sensible investing period both active and passive can play a role at different times for different markets.”
“Within our BMO Multi-Manager Lifestyle portfolios, between 13-16 per cent of the portfolios are exposed to passive vehicles – the lowest level since our management of the fund – with the remaining assets in carefully selected active funds,” adds Burdett.
The PassiveWatch report also revealed that there is a vast performance range between the best and worst performing passive funds. For example, over just one year for the period ending 31 December 2018, the best and worst passive funds in the Lipper Global Equity US sector range from +9.8 per cent and -11.1 per cent. The sector with the highest dispersion was Equity Emerging Markets Global, with a difference of 24.7 per cent between best and worst performing fund. The lowest dispersion of returns was the Equity Europe sector, with a dispersion of 2.6 per cent between top and bottom. Factors that are identified as being influential on performance outcomes by the BMO Multi-Manager team include the choice of index benchmark, manager charges, dividend policy, gearing, currency hedging and tracking methodology.
The PassiveWatch report notes the huge growth in the number of passive funds introduced over the past 20 years. In 1998 there were a total of 47 passive funds across the seven Lipper sectors the Multi-Manager team reviewed. By the end of 2018 that figure had increased by 817 per cent to 431. The Lipper sector with the highest proportion of passive funds is Japanese Equities, with 67 out of 204 funds (33 per cent) passively managed. The sector with the lowest proportion of passive funds is Bond GBP Corporates where 11 of 131 funds (7 per cent) are passively managed.
According to figures released by the Investment Association, retail sales of passive funds for the 12 months to the end December 2018 were GBP8.9 billion, down 16.5 per cent year on year. However, their overall share of industry funds under management rose to 15.7 per cent with a total AUM of GBP180.9 billion.
The survey also identified three key themes for passives –
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