The outperformance of passive funds continues in Europe, with the majority of active funds underperforming their benchmarks over the last 10 years according to both S&P Dow Jones and Morningstar.
- Whilst the degree of actives’ underperformance varied between regions, S&P showed active funds underperformed in every region measured (12/12), and the only region out of 15 in which actives outperformed according to Morningstar was in Norwegian equities.
- This was also true for the less-efficient small cap space, where 84% of European small cap active equity funds underperformed.
- Both findings are consistent with research from Lyxor, Vanguard, and Prometeia.
- ESMA research highlights that whilst actives may outperform before fees, passives have outperformed post-fees.
Section 1 of this post focuses on 2 sources of data: the Morningstar Active/Passive Barometer and the SPIVA reports. Both reports are updated every 6 months, and are cited widely in the industry as being the “scorecard” for assessing the performance of active funds. Both studies are conducted independently using their own separate data sets.
Section 2 contains a selection of other recent relevant studies that also contribute to the active/passive performance debate. Despite not being updated as regularly as the Morningstar and SPIVA reports, their conclusions are equally worth reading.
The Morningstar Active/Passive Barometer and the SPIVA reports
This section summarises the performance of active funds in Europe over the last 10 years, relative to their passive benchmarks. It focuses on funds priced in European currencies and investing in European countries (i.e. it excludes funds priced in Euros but which invest outside Europe. This data is, however, contained in the underlying reports). The underlying data can be found here, and here.
- Over the last 10 years, across both datasets, the vast majority of European active equity funds underperformed their benchmark. This was true not only of generic ‘European’ funds, but also of funds investing in individual European countries. Despite roughly 50% of active funds surviving after 10 years, the underperformance of the surviving funds show significantly fewer active funds both surviving and outperforming.
- According to S&P Dow Jones, 72% – 93% of active funds underperformed over 10 years (depending on the region/category).
- According to Morningstar, the stats were slightly better for active funds – although 14 out of 15 regions still had over 50% of active funds underperforming over 10 years. On average, 70% of active funds underperformed.
- The one category in which the majority of active funds outperformed their benchmark was in Norwegian equities, with 40% of funds underperforming.
- According to S&P Dow Jones, roughly 50% of European funds survived after 10 years – although there is considerable variance between regions (17% of Dutch funds survived vs 88% of Polish funds).
- Similarly, according to Morningstar, roughly 50% of European funds survived after 10 years. Again, there is considerable variance between regions (29% of Dutch funds survived vs 72% of Norwegian funds).
NB: S&P Dow Jones compares active funds’ performances against their S&P-assigned costless benchmark, based on the funds’ Lipper classifications. Morningstar compares active funds’ performances against a composite of actual passive funds – their “benchmark” reflects the actual, net-of-fees performance of passive funds.
NB: Survivorship is calculated by dividing the number of distinct funds that started and ended the period in question by the total number of funds that existed at the onset of the period in question (the beginning of the trailing one-, three-, five- and 10-year period)
Further evidence from other sources
ESMA – The EU’s securities regulator
Research conducted by the EU securities regulator, ESMA, in the first report of type, titled “Performance and costs of retail investment products in the EU” delved into the effect of fees on the performance of actively and passively managed European funds. Due to data limitations, the research excludes distribution costs, transaction costs, and performance fees, which would likely further increase the cost burden of active funds over passive funds.
“Costs are significantly higher for actively managed equity UCITS compared to passive UCITS. This leads to lower performance net of costs for active compared to passive equity UCITS.” [from the research paper]
“Retail fund investors lose up to a quarter of their gross returns in costs and charges” [from the FT summary]
Vanguard’s research paper, ‘The case for low cost index-fund investing’ shows on page 9 how between 60% and 90% of active funds underperformed their benchmarks over the last 15 years across all measured regions:
Lyxor’s research paper, ‘Analysing active & passive performance: What 2017 results tell us about portfolio construction’ shows on page 25 that between 11% and 50% of active equity funds outperformed their benchmark over the last 10 years – with well under 50% of active European equity funds outperforming:
Research from Italian consultancy company Prometeia showed that less than one in five of the funds sold to retail investors in Europe in the past three years outperformed their benchmark after fees were taken into account.
“The Italian consultancy examined the three-year record of 2,500 equity, bond and money market funds, with combined assets of €1.8tn, and found that only 18 per cent beat their benchmark.”