Record underperformance for active fund managers in this one UK sector

Active fund manager underperformance against their benchmarks continued in the first half of 2023, with UK small-cap investors recording their highest ever six-month period of underperformance.

S&P Global’s latest SPIVA scorecard on active versus index performance shows that 95% of actively managed UK small-cap equity funds underperformed the S&P United Kingdom SmallCap index in the first six months of 2023.

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Smaller UK companies have had a tough start to the year, with the FTSE Small Cap index flat after initially rising 6% in January. However, the Investment Association’s UK Smaller Companies sector dropped 4% over the six-month period.

The top UK Smaller Companies funds in the first half of 2023 were CT UK Smaller Companies (3% return), TM Tellworth UK Smaller Companies (2.9% return) and WS Gresham House UK Micro Cap (2.2% return). The bottom performers were: Premier Miton UK Smaller Companies (16% loss), FTF Martin Currie UK Smaller Companies (12% loss) and Stonehage Fleming AIM (10% loss).

UK large and mid-cap funds performed far better in the first six months of 2023, with an underperformance rate of 47%. UK fund managers buying companies of all sizes had an underperformance rate of 61%.

Looking at 10 years of data paints a better picture for small and mid-cap investors, with around 40% of funds beating their benchmark, making it the sector where active managers have collectively delivered the most value versus their index.

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Fund managers argue that it is easier to beat the index when investing in smaller companies as they are less widely researched than large companies, which makes it easier to find cheap shares to gain an edge over the index.  

Over a decade, the top UK Smaller Companies funds are: Stonehage Fleming AIM (164% return), Liontrust UK Smaller Companies (151% return) and Fidelity UK Smaller Companies (133% gain).

Generally, however, a longer time period is not favourable to active stock pickers, with 77% of UK Equity fund managers underperforming.

Global and US equity managers show the worst record of beating their index over long periods. S&P Global’s data shows that over a decade, around 95% of US and global active funds fail to beat their benchmark.

Much of this has to do with the rise of a small number of giant American tech stocks, which have grown large and larger. Tracker funds have continued to back these shares, while many active managers did not own them because of high valuations.

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Ben Voros, index investment strategy director at S&P Dow Jones Indices, said: “In what was otherwise a period of significant gains in most global equity markets, active equity managers in Europe had a challenging first half of 2023 with over one-quarter of 22 categories recording underperformance rates of 90% or higher.”

Bond managers had a better start to the year in relative terms, with no categories registering underperformance rates of over 90%. UK Corporate Bond funds saw an underperformance rate of 49% in the first six months of the year, the lowest among fixed-income categories.