Passive dominated once again in 2020, but will that change in 2021? A lot depends on the technology sector.
- Analysis from AJ Bell shows that only a third of active equity funds beat a passive alternative over the past year.
- The common denominator in all the regions where active funds have underperformed has been the technology sector.
- The ultra-loose monetary policy that has helped support valuations in the technology sector is clearly reversing, at the same time as companies are facing considerable regulatory hurdles.
It is surprising how often the year starts with a chorus of how ‘it’s going to be a great year for active managers’. Markets are finally going to stop flip-flopping between value and growth, we’re told, and pay attention to fundamentals, rather than being driven by all the market dramas and noise. This year is no different.
The problem is that, in recent years, this has seldom happened. Recent analysis from AJ Bell shows that only a third of active equity funds beat a passive alternative over the past year, with active outperformance particularly rare in the US, Global, and Asia Pacific regions. 2021 has been yet another year when investors haven’t cared very much about fundamentals.
Is there any reason to think it will change this year? The common denominator in all the regions where active funds have underperformed has been the technology sector. The global technology giants dominate the S&P 500, MSCI World and Asia Pacific indices. Laith Khalaf, senior investment analyst at AJ Bell says: “Global tracker funds increasingly resemble US tracker funds, making it more difficult for active funds to compete in this arena while the US maintains its ascendancy.”
As such, it seems that the biggest question in whether active or passive wins out over the next year is whether a narrow group of technology funds can continue their current run of form. As Khalaf puts it: “If the raging US bull market comes a cropper though, this performance differential could get turned on its head, seeing as the average global active fund is around 8% underweight the US compared to passive peers.” A turnaround in fortunes for a relatively small number of companies could inflict significant damage on the global stock market as a whole.
It’s worth noting that the longer term performance of active funds is far more encouraging. In Asia Pacific, Europe, GEM, Japan and the UK more than 60% of active funds outperformed their passive equivalents. The UK has been a particularly good home for active managers, with the average active fund returning 134% compared to 95.6% from the average passive fund over 10 years. This suggests that if the technology problem were to disappear, active managers could shine.
It would be bold to bet against the technology sector. The pandemic has made it stronger if anything. That said, the ultra-loose monetary policy that has helped support valuations in the technology sector is clearly reversing, at the same time as companies are facing considerable regulatory hurdles. It may finally be the year for active management to shine.
