Latest active vs passive data shows UK small caps outperforming

The latest report from S&P shows 45% of UK funds underperformed, but small-cap strategies shine. 

Less than half of UK actively managed funds underperformed in the first six months of 2020, according to the latest S&P Indices Versus Active Funds (SPIVA) Europe Scorecard – Mid-Year 2020 Results.

The SPIVA Scorecard showed that 45% of UK active equity funds underperformed the S&P United Kingdom BMI index. This index is the benchmark used by SPIVA – most UK funds use a different index as a benchmark.

The SPIVA Scorecard also showed that size was an important determinant of active outperformance. Over the six-month period, fund managers focused on small-cap UK stocks were much more likely to beat the benchmark than those investing in large or mid-cap stocks. A total of 78% of UK small-cap fund managers beat the S&P United Kingdom SmallCap index. In comparison, 48% of large and mid-cap fund managers beat the S&P United Kingdom LargeMidCap index.

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It has long been argued that active managers face better odds with small-cap stocks. Active managers seek out stocks that are potentially mispriced. Large-cap stocks tend to get more attention, meaning that their prices often closer reflect their fair value. Small-cap stocks, however, are often less covered by analysts, meaning that there is more chance of an active manager finding underpriced stocks.  

Over a longer period, the outperformance of active UK equity funds decreases substantially. Over a three-year period, 57% of UK funds were beaten by the benchmark, increasing to 66% over a five-year period and 69% over 10 years.

The performance of small-cap funds also declines over a longer period, but to a lesser extent. The SPIVA Scorecards show that over three years just 39% of UK small-cap funds were beaten by the benchmark, 38% over five years and 59% over 10 years.

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European equity funds experienced similar performance over the six-month period, with 49% of Europe ex-UK equity funds failing to beat the S&P Europe Ex-UK BMI. Over a longer period of time, the region looked worse, with more than 75% of funds being beaten by the benchmark on a five- and 10-year basis.

Elsewhere, the figures once again showed the highly efficient nature of the US market. In the first six months of the year, just under 60% of US funds failed to beat the S&P 500. Beating the S&P 500 index over that time would have required having very large holdings in large-cap tech stocks.

Meanwhile, over the same six-month time period, 49% of global equity funds failed to beat the S&P Global 1200 index, while 62% of emerging market equity funds failed to beat the S&P/IFCI Composite index.

Full performance can be found on the company or index summary page on the interactive investor website. Simply click on the company's or index name highlighted in the article.