How active funds fared vs FTSE 100 trackers during market rally

Fund investors who back the UK have, on average, seen their investments rise in value ahead of the FTSE 100 index during its stock market rally.

Since the end of October, the UK’s premier index has experienced a period of strong performance, which culminated in a record high of 8,076 points at the end of April. The  FTSE 100 went on to hit a new record this morning, surpassing 8,300 points. 

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There have been various drivers behind the rising tide, including hopes for interest rate cuts and the pound’s weakness against the dollar, with the latter boosting the FTSE 100 due to companies in the index earning most of their revenues outside the UK.

Overall, from 27 October 2023 to 30 April 2024, the FTSE 100 index is up 13.9% in total return terms, according to data from SharePad.

However, on average, fund investors would have fared better, with an average return of 16.2% for the Investment Association (IA) UK All Companies sector, according to data from FE Analytics.

The sector contains 232 funds, including active and passive strategies, and there are around 175 actively managed funds.

Over the six-month period, around seven in 10 actively managed funds in that UK sector outperformed the best-performing FTSE 100 index fund return of 13.9%, which was produced by Vanguard FTSE 100 Index Unit Trust. 

In addition, several passive funds with a focus on different parts of the UK stock market delivered higher returns than the best FTSE 100 tracker.

Passive funds, structured as index funds or exchange-traded funds (ETFs), follow the ups and downs of an index, while a fund manager picks stocks with the aim of beating the market return. 

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Topping the charts for best overall UK index fund was L&G UK Mid Cap Index, up 22.7%. Actively managed funds had less success at beating this tracker, with only 14 producing higher returns.

Overall, as the table below shows, an investor in one of the top five performing active funds over the period would have seen gains ranging between 24.5% and 30.4%.

Top five UK active funds vs best UK trackers 

Source: FE Analytics. Data from 27 October 2023 to 30 April 2024. Past performance is not a guide to future performance. 

A key takeaway from the data is that the “quiet rally” of the UK stock market has been broad, rather than confined to the behemoths in the FTSE 100 index. In fact, shares listed outside the FTSE 100 index have on average performed even better, with the FTSE 250 and FTSE UK Smaller Cap indices up 20.3% and 14.8% respectively.

Mid- and small-cap shares, which tend to generate more of their profits domestically compared to the large-caps in the FTSE 100, received an even greater boost over the period as a result of interest rate expectations changing. While a rate cut hasn’t happened yet, the consensus is that the next move will be down. Although, some fund managers are positioning portfolios for interest rates to remain at their current level for the foreseeable future. 

Actively managed funds can invest in companies across the market. Those with a bias to mid- and small-caps were well placed to benefit from the rally. Rising interest rates hit this part of the market, which caused many investors to become more cautious. When there’s a flight to safety, smaller company shares are one of the first areas investors look to sell due to their higher-risk nature.

The strongest performance over the period came from medium-sized companies in the FTSE 250 index. As a result, index funds and ETFs focusing on mid-caps benefited, with returns of around 20% for HSBC FTSE 250 Index, iShares Mid Cap UK Equity Index and Vanguard FTSE 250 ETF, for example.

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Three-year performance tells a different story 

However, when examining the past three years of performance, it’s a different story. The IA UK All Companies sector return is a lowly gain of 8.7%. In fairness, there’s been no shortage of headwinds, including the Covid-19 pandemic, the Russia/Ukraine war and interest rate rises.

Over this period (data to 30 April 2024), just one active fund, Invesco UK Opportunities, trumped the best-performing FTSE 100 index fund return of 39.3% with a gain of 46.2%.

The best-performing tracker, which doesn’t focus solely on the FTSE 100 index, also proved very tough to beat. iShares MSCI UK ETF returned 33.3%, a performance figure bettered only by four active funds, as the table below shows.

Over three years: top five UK active funds vs best UK trackers 

Source: FE Analytics. Data from 30 April 2021 to 30 April 2024. Past performance is not a guide to future performance. 

Time will tell whether the past seven months marks the start of a sustained period of strong performance for UK markets.

Investors remain cautious, which is reflected in the latest industry fund statistics showing that the worst-selling fund sector in March was UK All Companies, where £887 million was withdrawn.

However, there is always a danger of waiting on the sidelines for too long, which leaves investors open to not fully benefiting if and when a market recovery plays out.