31st July 2014
A new report from number-cruncher S&P Dow Jones dispels the long held myth that tracking emerging market indices is very much a second best to active management.
The research – covering one, three and five years to December 31 last – shows that the long held view that active managers can take advantage of inefficiencies and wider choice when investing in emerging rather than mature markets is either wrong or that the funds are unable to capitalise on these supposed advantages.
But the S&P Indices Versus Active Funds (SPIVA) Europe Scorecard Year does have better news for UK based active managers investing in their home market.
It has been a difficult period for emerging market assets, with the headline indices falling in 2013. S&P says: “During that period of heightened volatility and wide return dispersion, active managers failed to translate opportunities into relative outperformance.”
It adds: “ It is often believed that in less efficient markets, such as emerging market equities, active investing provides better results because of its ability to take advantage of perceived mispricings. The results for emerging market funds dispel this myth, as the significant majority of funds—regardless of the currency denomination— underperformed the benchmark across all three time horizons used in this report.”
During 2013, 61 per cent of emerging market funds denominated in sterling failed to beat their benchmark while the figures for three and five years are equally unhelpful to the active manager is better cause. The “failure” figures over three and five year time horizons are similar – at 59 and 62 per cent respectively.
The one consolation for UK managers – and their paying customers – is that euro-based funds investing in emerging market equities fared even worse. Their failure to beat the relevant benchmark was 71 per cent over one year, 84 per cent over three and 88 per cent over five years.
Active UK managers fared a little better in the US equity market where the past years have seen first recovery and then upward surges to record highs. Here 43 per cent of funds failed to beat the index over one year while the more relevant – especially for private investors – three and five year time horizons show 74 per cent and 52 per cent of funds respectively outgunned by passive strategies.
It was an even more gloomy story in global equity where the one, three and five year figures show 61, 80 and 67 per cent trailing their benchmarks. Passive fund proponents believe two thirds of active funds will not beat the relevant index – and that these change year by year.
But the Spiva report has more than a silver lining for UK based active funds investing in the UK – home to the vast majority of UK investor funds.
The “failure to beat the index” rate for UK equity funds was just 11 per cent in 2013 – 23 per cent over the three years and 14 per cent over five. There were similar results from the UK large cap sector – 10, 25 and 18 per cent although the small cap figures spoil the picture with 37, 61 and 48 per cent over the respective three periods underperforming a passive strategy. Small cap managers argue – just as their emerging market equity colleagues do – that the wider choice and greater perceived inefficiencies of investing in smaller companies should benefit active over passive.
S&P concludes: “While the report will not end the debate on active vs. passive investing in Europe, we hope to make a meaningful contribution by examining market segments in which one strategy works better than the other.”