A study by Hargreaves Lansdown has found that the proportion of UK active managers who outperformed last year was lower than usual, while their passive peers continued to gain market share.
Historically, UK equity managers have shown themselves better able than managers in most other regions to outperform their passive equivalents. But this was not true in 2022. Only 13.8% of UK funds outperformed the FTSE All Share and Vanguard FTSE UK All Share indices, compared with 37.7% in 2021, and 39.2% over the last ten years.
According to Hal Cook, senior investment analyst at Hargreaves Lansdown, this should not come as a surprise. One year is too short a period of time, he said, to give active managers scope to outperform.
The oil and gas sector’s notable performance benefited the FTSE All Share, and, in turn, passive funds. However, small and mid-sized businesses underperformed their larger counterparts. ‘The oil and gas sector’s exposure is more varied,’ Cook said, ‘but, with the rise of responsible investing, it is now more common for UK equity managers to have lower exposure to this area of the market.’
Meanwhile, US equity managers experienced the opposite effect, with a greater than usual proportion outperforming during 2022. More than 36.2% of US active funds outperformed the S&P 500 and Vanguard US 500 Stock indices, compared with 18.6% in 2021, and 16.7% over the last ten years.
Cook noted how ‘notoriously difficult’ it is to outperform passive funds consistently in the US, partly due to the large number of people analysing companies there, along with the vast amounts of information available.
The technology sector, considered highly valued by mid-2021, was the main contributor to the losses in the US. The sector’s returns slumped against rising inflation and other macroeconomic headwinds. This meant many active managers had less exposure to such companies for fear of a downward correction in share prices. In the long-term, however, most active managers underperform passive funds in the region.
Passive funds continued to take market share last year. Whereas in 2010, about 10% of assets invested in mutual funds were passive, this had risen to around 25% by the end of 2022. Active funds saw net outflows in 2022, while passive funds continued to receive net inflows, despite declining markets.