Most UK active funds failing to beat their benchmarks

It was the worst year for UK stock pickers in 20 years of data, as rising inflation caught fund managers off guard.

Last year was the worst ever recorded for active UK stock pickers, with fewer than 10% of funds outperforming their respective benchmarks.

S&P Global, a financial data firm, found that actively managed UK equity and UK large and mid-cap equity funds recorded underperformance rates of 92% and 97% in 2022.

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Meanwhile, 67% of actively managed UK small-cap equity funds underperformed their benchmark.

There was an extremely wide range of fund outcomes last year, with S&P noting that more than 20 percentage points in returns separated the best-performing fund in the bottom quartile of UK equity funds from the worst-performing fund in the top quartile.

In 2022, the FTSE All-Share index, including dividends, returned 0.3%, while the FTSE 100 returned 4.7% and the FTSE UK Small Cap index fell 21%.

In contrast, S&P found that the average UK equity fund lost 12.95% in 2022, UK large-cap and mid- cap funds lost 6.8%, and small-cap funds lost 24.54% on average.

Returns in 2022 were driven by the oil and mining sectors, as commodity prices rose in the wake of Russia’s invasion of Ukraine, as well as “defensive” pharmaceutical and consumer stocks.

However, many active fund managers missed out on these gains, with the UK’s FTSE All-Share index, which currently allocates about 10% to basic materials and 12% to energy, profiting from strong commodity prices. The index has around 17% in consumer defensive stocks and 12% in healthcare.

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For US shares, 67% of active fund managers failed to beat their benchmark in 2022, while for European shares 83% failed to do so. Three-quarters of global funds and emerging market funds failed to outperform last year.

Looking at longer performance periods paints an even worse picture for active fund managers, with the exception of UK shares, where around three-quarters of funds fail to outperform over three, five and 10 years.

For US stock funds, 98% fail to outperform over 10 years, and 94% after five years. Global funds are nearly as bad, with 93% failing to outperform over 10 years and 89% failing to do so over five years, according to S&P.

S&P found that active fund managers did not do better in down markets, despite what many fund managers argue.

“Conditions such as those endured by markets in 2022, replete with high volatility, high dispersion and high potential rewards for playing defence amid a downturn, are sometimes argued to be those most conducive to an actively managed approach.

“Certainly, there was a high potential for outperformance in European markets last year. Unfortunately, in many categories, there was also considerable potential for material underperformance,” it said.

S&P adjusts the data for funds that are liquidated or merged, and only looks at funds that can be accurately given a benchmark.

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Fund survivorship plays an influential role in determining underperformance. Over a 10-year horizon, on average, more than 40% of funds within S&P’s equity and fixed income categories were merged or liquidated.

“Since funds have to at least survive in order to be counted as outperformers, a low survivorship rate makes outperformance rarer. Conversely, underperforming funds tend to be less likely to survive in the consequent years — meaning that categories with a high underperformance rate this year may suffer from a lower survival rate in the near future,” it said.