Active management of UK equities: understanding historical underperformance and identifying long term opportunity

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.