Bulk of UK funds failing to beat index returns

Over the past year, fewer than one in 10 UK funds have beaten the market.

Most UK fund managers struggled to keep pace with the wider stock market in the first half of 2022, according to research fromS&P.

The index provider publishes regular scorecards on how many active managers are beating a comparable benchmark index.

In S&P’s latest study, UK funds fared the worst, with UK large-cap/mid-cap equity and UK equity recording underperformance rates of 96% and 92% for the first half of 2022, and 98% and 93.7% over one year.  

The longer-term figures are slightly better, but most funds underperformed. Over 10 years, around 70% of funds in both sectors failed to beat the index.

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UK smaller company funds have fared better. Year-to-date and over one year the underperformance rate is 56.8% and 66.3%. However, over three years and five years, most outperformed, with 17.1% and 30.8% underperforming. Yet over 10 years, 54.2% of funds underperformed.

Other regional funds saw the bulk underperform over both short and long-term time frames. For the first half of 2022, the underperformance rates for Europe equity, global equity, emerging markets equity, US equity, and Europe ex-UK equity were 82.1%, 74.9%, 73.4%, 68.7% and 62.1%.  

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Over 10 years, US equity has the lowest number of active fund outperformers, as 97.4% have underperformed. The US market is notoriously difficult for active fund managers to gain an edge over, given how widely it is followed. 

The data takes into account survivorship bias, factoring in funds that have merged or closed, usually due to substandard performance.

Despite high inflation and interest rate rises, the UK market as a whole has held up well year-to-date, outperforming most other exchanges, such as those in the US.

The FTSE 100’s strong relative performance is a consequence of a bias to ‘old economy’ stocks that make most of their money overseas, including oil companies, miners and banks. Such stocks have also benefited from sterling weakness, given that most of their earnings are made overseas.

However, as S&P’s data shows, most fund managers have not been taking advantage.

Separate data from FE Fundinfo shows that year-to-date (to 20 September) smaller company funds have been the worst-performing UK fund sector, with the average performer down 26.3%.

Funds in the UK All Companies sector – which can invest in large-caps, mid-caps and small-caps – produced an average loss of 12.1%. In contrast, the FTSE All-Share index is down 3.5% over the same period.

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Dividend-focused funds held up best, with a sector average loss of 5.4% for UK equity income.

The figures show that over the time period cited the best fund has been a passive strategy, namely the Invesco FTSE RAFI UK 100 ETF (LSE:PSRU), which is up 6.3%.

Of the top 10 fund performers – highlighted in the table below – most invest in dividend-paying companies.

While far from guaranteed, the prospect of a company paying a dividend gives investors greater confidence in terms of its valuation versus firms that are reinvesting cash back into businesses for future growth. With inflation and interest rates on the rise, investors have become more mindful of valuations. In turn, this has benefited dividend stocks, which have experienced higher demand.

Jupiter UK Special Situations, one of interactive investor’s Super 60 funds, is among the top 10 performers. The fund, managed by Ben Whitmore, invests in value stocks and its top three holdings are BP (LSE:BP.), Standard Chartered (LSE:STAN) and Shell (LSE:SHEL).

In 2022, fund investors continued to shy away from the UK, with the latest statistics from the Investment Association (IA) showing that £876 million was withdrawn from UK funds in July.

Source: FE Fundinfo. *Data from 1 January 2022 to 20 September 2022. Past performance is not a guide to future performance.