By MARK HINTON 06/10/2006
Almost all fund managers ultimately have a very basic remit – beat the Index. To help them achieve this, their employers typically provide them with a team of analysts, professional data analysis tools and a fat salary to boot. Given that fund managers also tend to be well-educated, intelligent individuals, the proportion that generally fails to beat the Index is therefore surprising.
| "The results clearly show that active managers generally struggle to beat the Index..." |
To establish the extent of this problem, we reviewed the most popular Investment Management Association (IMA) equity fund sectors over rolling three year periods each year for the last 20 years, determining how many funds beat a comparable Index over each period. While the results clearly show that active managers generally struggle to beat the Index, the proportion depends very much on the sector reviewed:
| IMA Sector |
Benchmartk Index |
Average % Funds beating Index |
| UK All Companies |
FTSE All Share |
35% |
| UK Equity Income |
FTSE All Share |
47% |
| UK Smaller Companies |
FTSE UK Small Cap |
66% |
| Global Growth |
MSCI World |
44% |
| Europe ex UK |
FTSE Europe ex UK |
45% |
| North America |
S&P 500 |
31% |
| Asia Pacific ex Japan |
MSCI AC Far East ex Japan |
59% |
| Japan |
FTSE Japan |
52% |
Figures show the average % of funds beating the Index over 20 three year rolling periods to 30 September 2006.
Source: Lipper. |
Managers in the UK All Companies and North America sectors have the poorest record with around only a third beating the Index, on average, over a three year period. Arguably this might be because these two markets are so intensively researched it’s hard to find opportunities that others have missed (and hence add value through stock picking), especially at the larger company end of the market. This suggests that in order to outperform managers may need to take big sector and/or company size positions versus the Index, which of course increases the scope for under-performance if they get it wrong. Unsurprisingly, some managers choose not to stray far from the Index for this very reason, meaning they have their work cut out beating the Index after charges. This has been especially apparent over the last three years; just 27% and 21% of funds beat the Index in the UK All Companies and North America sectors respectively.
| "It’s not all bad news, 81% of managers in the UK Smaller Companies sector beat the Index over the last 3 years." |
However, it’s not all bad news. Managers in the UK Smaller Companies and Asia Pacific ex Japan sectors have a more successful track record; in fact over the last three years 81% of managers in the UK Smaller Companies sector beat the FTSE Small Cap Index. This is likely because both are less universally researched than the mainstream sectors, giving managers greater potential to add value through unearthing opportunities before they are recognised by the wider market.
What is clear is that in most sectors even average funds may struggle to beat the Index, so it’s vital to seek out the managers with real ability. This is why we take fund research so seriously, grilling over 250 fund managers face-to-face each year in pursuit of the best. Even then there is no guarantee of success, but history shows that the majority of our rated managers deliver longer term.