It was the worst year for UK stock pickers in 20 years of data, as rising inflation caught fund managers off guard.
Last year was the worst ever recorded for active UK stock pickers, with fewer than 10% of funds outperforming their respective benchmarks.
S&P Global, a financial data firm, found that actively managed UK equity and UK large and mid-cap equity funds recorded underperformance rates of 92% and 97% in 2022.
Meanwhile, 67% of actively managed UK small-cap equity funds underperformed their benchmark.
There was an extremely wide range of fund outcomes last year, with S&P noting that more than 20 percentage points in returns separated the best-performing fund in the bottom quartile of UK equity funds from the worst-performing fund in the top quartile.
In contrast, S&P found that the average UK equity fund lost 12.95% in 2022, UK large-cap and mid- cap funds lost 6.8%, and small-cap funds lost 24.54% on average.
Returns in 2022 were driven by the oil and mining sectors, as commodity prices rose in the wake of Russia’s invasion of Ukraine, as well as “defensive” pharmaceutical and consumer stocks.
However, many active fund managers missed out on these gains, with the UK’s FTSE All-Share index, which currently allocates about 10% to basic materials and 12% to energy, profiting from strong commodity prices. The index has around 17% in consumer defensive stocks and 12% in healthcare.
- Active or passive: the ultimate guide to investing your ISA
- What 120 years of stock market data tells us about where to invest today
- Benstead on Bonds: best and worst bond sectors since rates began rising
For US shares, 67% of active fund managers failed to beat their benchmark in 2022, while for European shares 83% failed to do so. Three-quarters of global funds and emerging market funds failed to outperform last year.
Looking at longer performance periods paints an even worse picture for active fund managers, with the exception of UK shares, where around three-quarters of funds fail to outperform over three, five and 10 years.
For US stock funds, 98% fail to outperform over 10 years, and 94% after five years. Global funds are nearly as bad, with 93% failing to outperform over 10 years and 89% failing to do so over five years, according to S&P.
S&P found that active fund managers did not do better in down markets, despite what many fund managers argue.
“Conditions such as those endured by markets in 2022, replete with high volatility, high dispersion and high potential rewards for playing defence amid a downturn, are sometimes argued to be those most conducive to an actively managed approach.
“Certainly, there was a high potential for outperformance in European markets last year. Unfortunately, in many categories, there was also considerable potential for material underperformance,” it said.
S&P adjusts the data for funds that are liquidated or merged, and only looks at funds that can be accurately given a benchmark.
- Watch our Fundamentals video: what is a passive fund and is this the best way to invest?
- Watch our Fundamentals video: what does a fund manager do?
Fund survivorship plays an influential role in determining underperformance. Over a 10-year horizon, on average, more than 40% of funds within S&P’s equity and fixed income categories were merged or liquidated.
“Since funds have to at least survive in order to be counted as outperformers, a low survivorship rate makes outperformance rarer. Conversely, underperforming funds tend to be less likely to survive in the consequent years — meaning that categories with a high underperformance rate this year may suffer from a lower survival rate in the near future,” it said.
These articles are provided for information purposes only. Occasionally, an opinion about whether to buy or sell a specific investment may be provided by third parties. The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.
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.