AJ Bell’s biannual look at active versus passive shows active managers on the back foot.
- 42% of active managers beat their passive equivalents over the first six months of the year
- Global active funds suffered their second-worst period since AJ Bell launched the report in 2021
- This shouldn’t necessarily be taken as a sign to avoid active funds
The latest AJ Bell Manager versus Machine report was familiar uncomfortable reading for the active management industry. It showed that around 42% of active managers beat their passive equivalents over the first six months of the year, in line with last year. The data is a “huge embarrassment for the active fund management industry”, said AJ Bell, but is it really as bad as all that?
Certainly, there were some sectors where the news was grim for active investors. Global active funds suffered their second worst period since AJ Bell launched the report in 2021, with a mere 22% beating passives, and even worse readings over five and ten years. Similarly, only 19% of UK active funds beat passive options in the six-month period.
However, this shouldn’t necessarily be taken as a sign to avoid active funds. In the UK, the problem is that active funds have greater exposure to smaller companies, which has been a difficult area. Prioritising passive funds means an overweight position in expensive large companies, such as some of the banks and defence companies, while overlooking the bargains in small and mid caps.
It is the same for global funds. Given the strength of the AI trade, it is no surprise that passive funds have outperformed. However, that trade is wobbling as investors question valuations and the potential cyclicality of some of the AI infrastructure names. Investors focused on market-weighted passive funds have no defences.
Equally, there were some areas where active investment worked well. In emerging markets, for example, 63% of active managers have beaten the benchmark. For Asia Pacific ex Japan, it is 65%. This suggests active managers spotted the importance of the AI infrastructure trade ahead of time. It may also mean that they may recognise when it has moved too far.
Japan has also seen more than half of active managers outperform passives. The Japanese markets have followed a different pattern to other major markets. Smaller companies have kept pace, and value has outperformed growth. This has created easier conditions for active managers to thrive.
Managers in Europe don’t have the same excuses. Only 32% outperformed. Over five years that dropped to 26% and over 10 years, to 19%. European markets haven’t seen anything like the same momentum from a handful of companies. In this case, it appears fund managers are just parked in the wrong parts of the market.
Is it a “huge embarrassment”? It shows certain parts of the active management market aren’t working well, but others are delivering for investors. A more nuanced conclusion might be that there are areas where active works and others where it struggles, and there is a place for both styles in a portfolio.
