Active funds and the myth of British exceptionalism

I’ve been writing about the poor investment returns produced by active managers around the globe for more than a decade now. In that time, it’s often been suggested that British fund managers were an exception to the rule, and immune to the challenges facing their counterparts in the United States, for example.

But now comes new evidence which blows that theory out of the water. It’s all in the latest “SPIVA” scorecard produced by S&P Dow Jones Indices. SPIVA stands for S&P Versus Active — in other words, how active managers have performed relative to the appropriate benchmark.

The SPIVA team produces regular scorecards for several countries and regions; this latest scorecard examines the performance of fund managers in Europe, including the UK.

According to the latest data, a staggering 96% of UK large- and mid-cap equity funds underperformed the S&P UK LargeMidCap benchmark in the first half of 2022. The figure rises to 98% over the 12-month period to the end of June.

Worst performance on record

It’s the worst ever performance recorded by UK fund managers in the history of the SPIVA scorecard. And what’s particularly interesting is the timing. We keep being told that active management comes into its own when markets are volatile, as they were in the first six months of this year. And yet UK equity funds fared even worse over that period than they usually do.

The message is simple: very few active funds outperform the market, and the outperformers are extremely difficult to identify in advance. And yet most investors are still using them — and paying a significant premium for the privilege. They would be far better off using low-cost index trackers instead.

Style drift

Another key takeaway from the latest SPIVA data is that, when UK active managers have underperformed in the past it was mainly because of something called style drift. In other words, instead of investing exclusively in large stocks, large-cap funds have have “drifted” into the mid-cap and small-cap space instead.

Smaller stocks went on a winning streak a few years ago, but that changed last year, and larger stocks have since been back in favour. But most active managers clearly failed to rotate out of smaller companies and into larger ones in time, hence their dreadful recent performance.

Historically, smaller-cap stocks have tended to produce higher returns simply because they’re more risky. But you can gain exposure to mid- and-small cap equities using passive, or broadly passive, funds that are very much cheaper than traditional active funds.

Does your adviser recommend active funds?

It is, in short, a total myth that active fund managers in Britain are any better than those in other countries, and there is no logical reason for entrusting them with your money.

If your financial adviser is still recommending them, you need to find another adviser.