Much has been made of the fact that UK equity tracker funds have outperformed active managers over recent years. The questions arise: what has been the cause of the underperformance, and why might active management still offer value to investors in future?
In a new White Paper, we have analysed detailed (anonymised) data from the Investment Association (“IA”) covering 208 funds over 36 months to 31 December 2023. For the first time, we have been able to create a model of a composite IA portfolio, and to look at performance at the individual stock level. Our analysis of the data shows that the IA All Companies sector underperformed the FTSE All-Share Index over this period, because of a significant underweighting to a small number of the very largest, internationally orientated companies, which had outperformed smaller stocks over the period. We conclude that the difference in weights held by active UK fund managers compared to the FTSE All-Share Index is largely structural, arising from ownership of the largest stocks by international regional and global funds. And that is then magnified by the growth in UK domestic tracker funds and ETFs that very largely follow the FTSE 100.
The analysis goes on to show that although the structural differences may well endure, this is not necessarily a long-term disadvantage. Instead, the long-term outperformance of smaller and mid-caps, and the ‘oxygen’ of increased volatility that fuels opportunity for stock picking, suggests that (after 3 years of underperformance) the long-term outlook for UK active managers, relative to passive funds, remains especially attractive.
Markets were relatively volatile during the quarter, with investors being pulled between the negatives of geopolitics and weaker industrial demand, and the potential benefit of lower interest rates.
Better inflation data prompted a strong start to the quarter, however, there was a sharp sell-off in August as positivity around interest rates was swamped by fears of a US recession. These fears gradually dissipated, and markets largely recovered by the end of the quarter.
In this video, fund manager Martin Walker discusses what has been happening in UK markets, economic news and recent fund performance, plus his outlook for UK equities.
The value of investments and any income will fluctuate (this may partly be the result of exchange rate fluctuations) and investors may not get back the full amount invested.
This is marketing material and not financial advice. It is not intended as a recommendation to buy or sell any particular asset class, security or strategy. Regulatory requirements that require impartiality of investment/investment strategy recommendations are therefore not applicable nor are any prohibitions to trade before publication. Views and opinions are based on current market conditions and are subject to change.
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