The pandemic has created opportunities for many active funds, when compared to passive rivals, according to the latest report from BMO Global Asset Management.
Its found that the best active fund in the US, beat the best-performing passive fund over a 10 year period. This is the first time this has happened since BMO started published this PassiveWatch report in 2014. The best active fund in this sector outperformed the best passive fund by 120 per cent.
Of the seven Lipper Global sectors analysed, active outperformed passive over the 10 year period with just one exception – Global Emerging Markets, with the FirstTrust Chindia ETF, a passive fund providing sole exposure to technology stocks in the Chinese and Indian stock markets.
However this comparison of the ‘best’ active funds does not disguise the fact this has been a tough period for the average active manager.
This report also looked at the larger four passive funds by AUM for each of the seven Lipper Global sectors to determine a mean of their percentile rank on a rolling five-year window, there was a wide dispersion in performance between the sectors.
For example, the four largest European passive funds ranked as low as 71st percentile for five years to the end of Q1 2016. Since then, the passive funds have surged to finishing 35th percentile.
The hardest place for active management has consistently been the US market, where the average of passive funds has mostly been top quartile over each of the five-year windows reviewed. However, the trend is now less favourable for the US market, showing active managers to have had an improved opportunity of late.
The report also compared the performance of the best fund in each sector against the average fund over the last 20 years in five Lipper sectors (It did not cover Emerging Markets Global or Bond GBP Corporates sectors, as there were no passive funds in these sectors 20 years ago).
The UK sector’s best performing active fund, BlackRock Growth & Recovery showed the largest disparity, outperforming the average passive fund by a multiple of 7.2.
The Japan sector recorded the second largest difference at a multiple of 4.7, and in Asia the best active fund, Baillie Gifford Pacific c delivered just over double the average passive fund.
Out of the seven sectors, Equity US sector recorded the highest proportion of passive funds, replacing Equity Japan, with 145 of its 428 funds (34 per cent) passively managed. The Bond GBP Corporates sector continues to record the lowest proportion of passive products at 11 per cent (14 of 131 funds).
BMO Global Asset Management, co-head of multi-manager people team Rob Burdett said “Our analysis strongly pointed to a trend of growing disparity in the range of performance between the best and worst passive funds, which is determined by the choice of index benchmark, charges, dividend policy, gearing, currency and tracking methodology.
“This divergence highlights the opportunity for the ‘active’ passive fund buyer, while allowing investors to efficiently manage costs while adding diversification. Our analysis however identified some emerging trends which are more favourable to active managers, particularly in the US. Against this backdrop, we are currently at the lower end of our historical passive exposure across our Multi-Manager Lifestyle fund range.”
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