Most European-focused equity fund managers failed to beat the market in sell-off

One of the key attractions of active funds is their supposed ability to provide protection in a market sell-off.

Most European-focused equity fund managers failed to beat the market in the first quarter of the year, according to the latest biannual SPIVA Europe Scorecard report from S&P Dow Jones Indices.

Market volatility is often seen as providing a chance for active management to outperform. However, over the course of the first quarter of 2020, active funds in Europe that invest in European equities provided an average loss of 22.7%. Meanwhile, the S&P Europe 350 index lost 22.4%, meaning active funds lost on average 0.3% more than the index.

At the start of the year European equity funds did provide a slightly better return. While the index lost 1.3%, the asset class saw an average decline of just 1%. This better performance continued into February, when funds lost 7.7% compared to the index’s 8.6%.

However, when it came to March, the most volatile month of all, European fund performance started to slide. On average actively managed funds lost 15.5% compared to a 14.1% drop for the index.

Looked at differently, the majority of European equity funds failed to beat the index in either March or the first quarter of 2020. In March, 66% underperformed the index, falling to 57% when measured over the first quarter of the year.

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Andrew Cairns, senior analyst at Global Research & Design at S&P Dow Jones Indices, notes: “The large proportion of underperforming active funds in March 2020 would suggest that despite their ability to time the market and extract value, fund managers broadly failed to utilise their skills and navigate the market in one of the most turbulent months.

“This is contrary to the widely held belief that market volatility provides a better opportunity for active managers to outperform.”

Indeed, one of the key attractions of active funds is their supposed ability to provide protection in a market sell-off. With the portfolio decided by a discerning manager and team of researchers, they can pick companies that can hold up better in the face of an economic downturn.

These may include companies that are non-cyclical, meaning their revenues rarely change with the ups and downs of the economy, or those deemed “quality” due to the strength of their balance sheet and other financials. Clearly, most fund managers were not overweight such companies.

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Of course, not all funds claim to provide this sort of downside protection and therefore would have no reason to be overweight in these areas, which can come at the expense of outperformance in a bull market. Instead, such funds are likely to have greater weightings to companies expected to outperform when markets are going up.

However, as previous SPIVA Europe Scorecard data has shown, Europe equity fund managers have hardly held up better when markets were more buoyant.

The end-of-year data for 2019 showed that 71.1% failed to beat their benchmark over the past year, rising to 77.5% over a five-year period and 87.1% over a 10-year period.