Only a third of active UK equity funds have outperformed a passive alternative this year, according to research by investment platform AJ Bell.

The UK platform’s Manager versus Machine report analyzed the performance of around 800 retail open-ended funds across seven Investment Association equity sectors.

AJ Bell found that only 34 percent of active equity funds beat the median performance of passive funds in their respective industry this year.

The rate of active outperformance relative to passive competitors is particularly low for global and North American equity funds, standing at 25% and 19%, respectively.

Laith Khalaf, head of investment analysis at AJ Bell, said: “2021 has been a pretty dark year for active managers, with passive funds dominating the roost and offering better returns to average investors.

“Outperforming active funds were particularly scarce in the Global and North American sectors, which are extremely important to investors as they are two of the most popular areas for investment, accounting for £ 270bn (€ 318bn) investor money. “

He added that in the North American sector, “the picture does not improve much over a 10 year period”.

Over the past decade, 22% of active funds in North America have outperformed the median performance of their passive peers. That figure rises to 32 percent over the past five years, according to the AJ Bell report.

“The long-term underperformance of funds active in these sectors suggests that there is a structural reason why relatively few funds outperform a passive alternative,” Khalaf said.

“This is undoubtedly due in part to the fact that the US stock market is scrutinized by so many analytical eyes, and active managers understandably have a harder time finding an edge. But the continued dominance of the market by a small number of large tech stocks may also fuel the equation. “

“This problem has also increasingly affected the global sector, as the US stock market has grown to such an extent that it now represents about two-thirds of the global index,” he said. added.

Some 40 percent of active global funds have beaten their passive rivals in five years, while only 30 percent have in ten years.

“If the raging US bull market comes a reframing. . . this performance differential could be completely reversed, given that the average global active fund is approximately 8% underweight in the US relative to its passive peers, ”Khalaf wrote.

He added that since 56% of active funds had beaten a passive 10-year alternative, it suggested that “investors need to be picky when it comes to buying active funds and perhaps the regions in which they choose. to allocate to active managers “.

In 2021, 41% of active UK equity funds exceeded the median performance of passive funds in the same sector. However, the outperformance rate over liabilities is 85% over 10 years.

Active equity funds from Europe outside the UK and global emerging markets outperformed passive competitors over 10 years by 64% and 72% respectively, according to AJ Bell.

* Ignites Europe is a news service published by FT Specialist for professionals working in the asset management industry. It covers everything from new product launches to regulations and industry trends. Trials and subscriptions are available at igniteseurope.com.

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