Most active funds beating the benchmark

Is the tide turning for active fund management?

Whereas before proponents of the passive approach to investing were pleased to explain that actively managed funds rarely beat the market, new research has suggested the opposite is now true.

According to the research by Spiva, nearly 90% of actively managed UK equity funds beat their benchmark index in 2013.

The research found S&P’s UK benchmark index outperformed active fund managers only 11% of the time during the course of last year.

Over the past three years the figure was 23%, and over five years it was 14%.

This is something of a UK equity anomaly however. Looking at the S&P’s Europe 350 equity benchmark, active managers were beaten 61% of the time during 2013, 77% of the time over the past three years, and 64% during the past five years .

The research also found that the majority of emerging markets equity funds underperformed their benchmarks over one, three and five years, regardless of their currency denomination.

Nearly 60% of sterling-denominated emerging markets equity funds were beaten by their benchmarks over the one, three and five year periods considered to the end of 2013.

It is thought this strong performance by active UK fund managers could be the result of the dominance of the largest five UK companies in major benchmark indexes.

Because many active fund managers would not consider placing a large part of their portfolio in relatively few shares, they instead shift their focus away to other (smaller) companies and this creates the potential for outperformance.

What this research should tell investors is there is a place for active and passive fund management within a well diversified portfolio.

Of course what really counts is the asset allocation strategy, rather than underlying fund selection which has potential to add only limited extra value to portfolio returns.

Aligning your asset allocation decisions with your investment objectives is the single most important thing you should do when investing money.

Making decisions about whether to use an active or passive fund manager should fall much further down your list of investing priorities.

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