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Active v Passive Revisited

If you’ve read this week’s newsletter or many of our previous blogs, you’ll know just how badly the FTSE 100 has been performing.

The top 100 index fell from over 7,100 on 27 April to below 5,900 on 14 December. Even if we include dividends it fell 15.3%, though it has since bounced back quite sharply.

However, over the same period our UK Dynamic portfolio of actively managed UK funds went UP by 6% on average. The best performing fund over that period, Miton UK Value Opportunities, made 11.42% between those two dates.

The Miton fund is benchmarked against the FTSE Allshare index which has been marginally less terrible than the top 100, being “only” down 13.1% over that period. That means the Miton fund has outperformed its benchmark by 24.5% over less than six months.

This might be an extreme case but it’s certainly been a good period for actively managed funds in relative terms. The average fund in the UK All Companies sector is down 8.8% over the period, 4.3% better than the Allshare.

There are 287 funds in this sector. Over this period, 233 funds or 81% have beaten the Allshare with only 54 funds behind the index. Many of these are index trackers. Only 17 funds have underperformed the FTSE 100 during that time.

This pattern is also noticeable over five years with the sector average returning 36.33% against the FTSE Allshare’s 26.95% return. 187 of the 267 funds that have a five year history beat the index, or 70% of funds. If you had randomly selected an active fund over that period you would have had a very good chance of beating an index tracker.

On the face of it, this has therefore been a bad period for passive investors in the UK.

But what about over the other side of the Atlantic? Well it’s a totally different picture in the US with the main S&P 500 index returning 84.98% over five years whilst the average fund in the UT North America sector returned only 68.02%.

Of the 69 funds in the sector which have a five year track record, only six have beaten the S&P 500, less than 9%.

So, why the big difference? Well, part of the reason UK active funds have done so well is they tend to have more in medium or even smaller companies than the FTSE Allshare. Approximately 80% of the Allshare is accounted for by the top 100, which has only returned 19.5% over five years. Meanwhile, the next 250 largest companies (the FTSE 250 index) has returned 68.5% and the FTSE Small Cap (ex IT) returned 82.6%.

As discussed in past blogs the FTSE 100 has a high proportion of oil and gas producers and mining stocks, which have had a very poor run. Just by avoiding those stocks and instead having more mid and small companies, an active fund will have outperformed.

The main US index is much better diversified and has less exposure to commodities and so has been a much harder benchmark to beat.

Active UK funds don’t always do so well. In the previous five year period ending 14 December 2010, the average fund returned only 24.94% whilst the FTSE Allshare returned 30.52%.

This all illustrates why we believe it is far too simplistic to say active or passive funds are better. It depends on regional variations and different stages in the market cycle.

Recently we’ve held much more in the way of active funds, especially in the UK where we had felt that smaller companies looked better value than larger ones. However, in the US we have held only a tracker fund until very recently.

In the past we’ve had much more index exposure and there will be times where that will be the right call again.

In the end, this all comes back to our belief that the asset allocation is the core driver of returns. This can be extended to include altering weightings to different styles and sectors within stockmarkets.


The content contained in this blog represents the opinions of Equilibrium investment management team. The commentary in this blog in no way constitutes a solicitation of investment advice. It should not be relied upon in making investment decisions and is intended solely for the entertainment of the reader. You should be aware that the value of an investment can go down as well as up, and no guarantees as to the future performance, income or capital growth are given expressly or by implication. Prices of individual properties or other assets may fall as well as rise.