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.
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