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Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.
In an uncertain world you can always rely on Alphaville. Whenever there’s a study that dunks on active portfolio management, we’ll be here to cut and paste.
Today’s active management dunk comes from Morningstar. Twice a year it publishes an active/passive barometer that benchmarks active funds using a composite of passives rather than an index. The idea is to reflect investor costs, which indices don’t, and capture the true make-up of individual portfolios.
For 2023, slightly more than 31 per cent of active managers beat their relevant passive composite, Morningstar finds, meaning nearly 69 per cent did not.
Poor performance means nearly half of active funds die within a decade. But even if survivorship bias is ignored, the long-term win-to-lose ratio remains far below 50 per cent.
Once closures are taken into account, just 17 per cent of funds outperform over ten years:
Active managers did best relative to passives during the China-led stock market sell-off in 2015-16, the 2021 everything rally, and the 2018 bear market that’s usually blamed on premature worries about tighter monetary policy. Last year’s theme-heavy equity and bond trading made for averagely bad performance:
One possibly counter-intuitive theme to emerge from the data is that concentration is good, so long as it’s the right type.
The US market’s big-tech concentration has been the wrong type. Having a market where only seven stocks count towards the final scores is very inconvenient for stock pickers. But “active funds are more likely to succeed in equity categories where the average passive counterpart exhibits a structural bias toward a particular economic sector or is concentrated on a few individual names,” Morningstar says.
It highlights Indian equities, where the one-year and 10-year success rates for active managers were 64 per cent and 54 per cent, respectively.
Since Indian passive equities funds are mostly large-cap, active managers have an opportunity to represent the sweep of the wider market, Morningstar says. What’s not mentioned explicitly is that the passives were holding some absolute dogs, including the Adani group of companies, and even the doziest of managers would have spotted some red flags on Adani last January.
The same dog-avoidance benefit probably contributed to actives beating passives last year in Denmark, where selling Ørsted and Genmab on the first sniff of trouble while holding on to Novo Nordisk would have guaranteed outperformance. Finland, among Europe’s worst-performing markets of 2023, proved similarly easy for stock pickers because it was easy to avoid outsized exposures to Russia and China.
Morningstar has put its 2023 active/passive barometer report outside the paywall. If you’re an out-of-work fund manager who’s shopping for a market where crap can be easily identified, yet will be too big to fall out of passive portfolios, it’s recommended reading.
