The Evidence-Based Investor

Oh là là! Active funds are a Europe-wide fail

Posted by Robin Powell on March 21, 2016

TEBI readers in Europe may want to skip to the third paragraph, but for those elsewhere in the world, I ought to provide some background information.

On a Saturday night each May, this great continent of ours, the cradle of western civilisation, closes down for a giant celebration of kitsch, called the Eurovision Song Contest. The songs are often out of tune, the lyrics dreadful, the dance routines even worse. The Eastern Europeans all vote for each other; and the UK, the nation that gave the world the Beatles, frequently comes in last.

I must say I thought of Eurovision when reading the results of the newly released Europe S&P Indices Versus Active Funds (SPIVA) Scorecard for 2015. SPIVA has been the go-to scorekeeper for active fund performance for 14 years now, measuring funds against their relevant benchmark. But this is the first time that European fund managers have had their performance compared to that of their counterparts in countries across the continent.

The overriding message is that although there are patches of reasonable performance, the overall standard is pretty dreadful. From London to Frankfurt, and from Oslo to Milan, fund managers are about as bad as each other at doing what they’re paid to do, namely beating the market.

So, who are the worst performers? Well, the wooden spoon goes to the Netherlands. 100% of Dutch active managers have underperformed their benchmarks over five years; that’s right, every single one. Swiss managers fared little better; just 5% of outperformed over the same period. Over all time periods — one, three, five and ten years —  Danish fund managers have also performed consistently poorly.

And the best performers? I feel no swell of patriotic pride whatsoever in revealing this, but UK managers have actually done the best (or, more to the point, the least badly) of all the countries SPIVA looked at.

But before UK investors entrust active managers with their entire life savings, let’s put the figures in perspective. Most people save for retirement over a period of at least 30 years. But 53% of UK active managers fail to beat the index over just five years, and the figure rises to 72% over ten.

Based on those figures, the chances that any UK-domiciled active fund will outperform over 20 (let alone 30) years are pretty small. Indeed, there is a very high chance that your chosen fund won’t even exist 20 years from now. 54.62% of UK equity funds operating ten years ago have since closed down or been merged with other funds.

I personally pay no attention to time periods shorter than five years, but the industry and the media love to wax lyrical on performance over three years and even one. However, even over shorter periods, European fund managers have overwhelmingly failed to justify the fees they command.

Over the calendar year 2015, for example, when markets were relatively volatile and supposedly provided good conditions for active managers, 73.6% of active global equity funds underperformed the S&P Global 1200. Over ten years, the figure rises to 97.8%.

And another thing. We keep hearing advocates of active management say that active funds are particularly effective in supposedly less efficient markets. But 74.9% of emerging market funds underperformed the S&P/IFCI last year, rising to 97.0% over ten years.

Like the latest SPIVA data for the US, these figures are nothing short of embarrassing. Asked about the European data by the FT, David Blake, director of The Pensions Institute at London’s Cass Business School, summed it up by saying:

“The average equity fund manager is unable to deliver outperformance from stock selection or market timing. This means a typical investor would be almost 1.44 per cent better off per annum by switching to a UK equity tracker.

“A small group of star fund managers are able to generate superior performance, but they extract the whole of this outperformance for themselves via fees, leaving nothing for investors. All but the most sophisticated investors should invest in index funds.”

How many times, the likes of Professor Blake must wonder, do we have to keep on saying exactly the same thing? There might even be another UK winner of Eurovision before we finally get the message.

Image: Aktiv I Oslo.no

Related posts:

The scores from Europe are in — and it’s nul points for active managers

SPIVA: What it is & what it tells us — an interview with Craig Lazzara (Part 1)

Poor fund performance is a global problem — an interview with Craig Lazzara (Part 2)

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Robin Powell

A journalist and broadcaster, Robin Powell is a campaigner for positive change in the investing industry. He runs a communications company for the evidence-based investing sector called Regis Media.

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