Active funds underperform passives in market downturns

Stockmarket-Stock-Market-FTSE-Performance-700x450Few active funds have protected investors better than passives in market downturns, FE data shows.

The research carried out by Bristol-based IFA Wychwood Financial Services and shared with Fund Strategy’s sister title Money Marketing shows average funds in the UK, US and Global Equity sectors have returned less than the equivalent passive funds over the past 10 years.

In downturn conditions they have performed significantly worse. For instance, the average surviving fund in the UK All Companies sector lost 32.02 per cent in 2008. The L&G 100 Index fund, however, lost 27.88 per cent, which puts it in the second quartile. Many active funds lost 40 per cent or more in the same year.

One active fund, the SVM UK Opportunities fund, lost 54.87 per cent. The lowest active fund loss was the Newton UK Equity fund at 17.98 per cent.

In 2008 many Global Equity Sector active funds lost around 50 per cent, while the worst performing passive fund, the L&G Global 100 Index Trust, lost 14 per cent.

The best performing fund for the year was a passive fund, the L&G Global Health and Pharmaceutical Index which was up 8.36 per cent.

Within the Global Equity sector in 2008 the average fund was down 24.18 per cent.

The Blackrock NURS II Overseas Equity fund lost 18.50 per cent and the Aviva International Index fell 18.92 per cent, putting them both in the top quartile, the data shows.

Wychwood Financial Services director Rob Wood says: “Passive funds have a large-cap bias and will generally protect on the downside, when compared to products that hold a higher proportion in smaller companies.

“This will not always be the case, but generally over history larger companies have been more resilient than smaller ones in a downturn, and for obvious reasons.”

Diamonds in the rough

In 2011, the average surviving fund in the Global Equity sector was down 9.43 while the L&G Global 100 Index dropped 3.42 per cent, the Vanguard FTSE Developed World ex UK Equity Index fell 5.61 per cent, and the Blackrock NURS II Overseas Equity fund slipped 6.41 per cent.

In that year, many active funds lost close to, or more than 20 per cent.

Again, the best performing fund was the L&G Global Health and Pharmaceutical Index, which was up 10 per cent.

The FE figures in the research don’t include closed or merged funds, which would have made the results “almost certainly” worse, Wood says.

“There are many advisers and consultants that believe active funds protect on the downside, but passive funds do not. Passive is a bull market product only I hear them cry, buy an active fund, pay higher fees and we will protect you from financial Armageddon”

He adds: “Some funds have significantly protected on the downside but given the above it’s clearly only a small proportion. Therefore the chance of finding the funds you need in advance of a downturn, from the small proportion is nigh on impossible.”