Only 28% of active funds in Europe outperformed their traditional benchmarks in 2016, according to research from European ETF provider Lyxor, adding support to passive trackers such as ETFs in the active vs. passive superiority debate.
Marlene Hassine, head of ETF research at Lyxor.
The low percentage of outperforming active funds represents a significant decline compared to 2015 when 47% of active managers beat their benchmarks.
Lyxor’s ETF research team studied the performance of 3,871 active funds established in Europe, representing €1.2 billion in AUM, compared with their benchmarks over a ten-year period.
According to the findings, those active managers who did succeed in outperforming their broad market benchmarks were more likely to do so by targeting returns attributable to value (low valuation) risk factors in their investment approach, while managers targeting low-beta, quality and momentum factor returns were far more likely to underperform.
In addition, Lyxor writes: “The underperformance of active managers relative to their traditional benchmarks in 2016 compared with the previous year can be attributed to market conditions being devoid of meaningful trends and instead dominated by frequent stylistic rotation from one factor to another, with an overall lack of salient factors.”
Marlene Hassine, head of ETF research at Lyxor, commented: “In the current market environment, which is influenced more by politics than by the economy, it has been difficult for active managers to generate performance and take advantage of changes in trends in 2016. These political uncertainties, still to the fore in 2017, particularly in Europe, are certainly going to make the task of investment managers harder in 2017.”
The report also notes that when comparing the performance of active investment funds in Europe which are benchmarked against smart beta indices (those that weight their constituents by a method other than market capitalization), the percentage of funds able to provide outperformance dropped to just 13%. The findings suggest that investors who wish to access a smart beta investment strategy may have even more reason to do so through a passive vehicle such as an ETF.