Where and when active management pays off

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Advisors were asked to ‘choose’ their active allocation, as research shows that investing in actively managed funds is more likely to pay off in sectors with greater inefficiencies, areas less studied, and while the markets are down.

According to new data, only half of active managers performed better in monetary terms – after factoring in fees – than their passive counterparts in the aftermath of the coronavirus-induced stock market crash.

The figures, provided by Albemarle Street Partners, show that 50.6% of active equity managers beat their benchmark tracker in the three months to June. This figure was 54% in the first quarter of 2020.

Charlie Parker, Managing Director of Albemarle Street Partners, said: “The second quarter was a much tougher market for active managers than the first quarter.

“While managers were able to quickly sell off the worst affected segments of the market in the first quarter, it was much more difficult to capture the recovery in the second quarter. “

Albemarle’s “active reimbursement” research calculates in pounds sterling and pence how much a fund has earned after fees beyond a proper passive comparison.

The best performing fund relative to its tracker in the three months to June – the Morgan Stanley US Growth fund – returned 39p in pounds more than its passive equivalent after factoring in active charges.

Therefore, for each pound returned by the equivalent tracker, investors received £ 1.39 if they were invested in Morgan Stanley’s portfolio.

Schroder’s ISF Global Energy was the second best performing in terms of ‘active redemption’, providing 36p more in sterling than its passive counterpart, while MFM Techinvest Special Solutions, Baillie Gifford American and Morgan’s US Advantage Stanley were the top five.

T2
Funds “Active refund”
Morgan Stanley U.S. Growth £ 0.39
Schroder ISF Global Energy £ 0.36
MFM Techinvest Special situations £ 0.35
Baillie Gifford American £ 0.33
Morgan Stanley U.S. Growth £ 0.26
L&G Growth Trust £ 0.24
Aubrey Global Conviction £ 0.20
Merian UK Mid Cap £ 0.18
Global focus of Invesco £ 0.18

Where to turn to the active

The proportion of active managers exceeding their passive benchmark varied considerably across sectors.

Active managers were leaders in the UK small companies sector of the Investment Association, with 88% of funds beating their pound and pence counterpart, while 74% of managers in the IA European small companies sector outperformed passive funds after costs.

The picture for active management was less positive elsewhere, however. Only 40 percent of active funds delivered “active amortization” in the Europe ex-UK sector, while less than a third were worth it in the Asia-Pacific, Global and North America sectors.

Only a fifth (21%) of funds in the IA UK All Companies sector performed better in pounds and pence after fees than their passive counterparts.

Tom Sparke, Investment Manager at GDIM, said: “There are definitely places that are more suited to active management and those that are best served by a passive fund.

“Personally, I think funds that are active in most areas have a better chance of outperforming right now, because there are so many clear distinctions between sectors that are booming and those that are struggling or structurally challenged. “

Mr Sparke said he often used passive funds to gain exposure to sovereign bonds, as government bonds were a “vanilla asset” which tended to “always serve the same purpose”, while he opted for active management in regions where “unknown dangers lurk”, such as emerging markets.


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