Interactive Investor

Active funds outperformed passives during Covid-19 crisis

Greater exposure to value stocks helped active UK funds outperform passive over the past six months.

10th February 2021 10:34

Hannah Smith from interactive investor

Greater exposure to value stocks helped active UK funds outperform passive over the past six months.

UK active fund managers have outperformed passive funds over the last six months as the Covid-19 pandemic reversed several years of underperformance.

A study by the wealth manager Bowmore Wealth Group of 750 UK large-cap funds found that the actively managed ones returned an average of 8.3% over the last six months, compared with 5.1% for the average passive fund. The FTSE 100 returned 6.2% over the same period.

Their greater exposure to value stocks will have helped active UK funds outperform, Bowmore says, noting the recent comeback of these previously unloved cyclical stocks. Since November’s vaccine breakthrough news, a recovery in the oil price has helped propel undervalued oil and gas companies higher, while bank shares have also regained ground.

Trades that paid off

Bowmore notes that trades that worked well for its own clients included a higher allocation to the UK market following an underweight position, which it had held for several years. The wealth manager says that it saw UK stocks as undervalued pre-pandemic, and even more so during the crisis as share price falls presented opportunities to buy in.

The firm replaced more general global equity exposure with a specific allocation to a technology fund, and added to positions in Europe at the start of November as the market began to outperform, having held no exposure for two years. It also used exchange-traded funds tracking the S&P 500 and FTSE 100 to capture value when markets were at significantly lower levels.

Times of turbulence

“2020 was not the year to rely solely on passive funds,” says Charles Incledon, client director at Bowmore. “Not all active fund managers can beat the market, but the best active managers continually demonstrate that they can. It is vitally important to have those funds in your portfolio when markets are falling, as much of the outperformance tends to come from downside protection.

“Times of turbulence are when conviction trades really matter. The pandemic has created a situation where there are significant winners and significant losers. Tracking an entire market in this type of situation means you will benefit from the winners, but will also suffer as a result of the losers. Now more than ever, being selective is vital”.

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