Revealed: the top funds in the top sectors for active managers

Just a quarter of funds have beaten a rival tracker over the past decade. Sam Benstead reveals the top sectors for active management.

There were just three investment sectors where most active fund managers beat a passive alternative in the 10 years to June 2022. The study measured the performance of active funds available to European investors.

According to financial data group Morningstar, these were the global equity income, UK equity income, and Switzerland property sectors, where 57%, 59% and 57% of funds respectively beat a cheap tracker for their market.

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In the same 10-year period, it found that the average rate of success for active equity managers over the past decade was 24%, while the average rate of success for bond active managers was 21%.

Shorter-term performance for active funds has been similarly unimpressive. In the year to June 2022, on average 35% of active funds survived and outperformed their passive peer. Stock pickers “failed to impress”, according to Morningstar.

Morningstar compared active funds against existing passive alternatives, not just an index, so that passive fund fees are part of the calculation.

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“All told, the Active/Passive Barometer is a useful measuring stick that can help investors calibrate the odds of succeeding with active funds in different areas based on recent trends and longer-term history,” it said.

If historic performance is anything to go by, investors looking to beat a passive fund could be well served by the UK and global equity income sectors, where there is a wide pool of funds available to UK-based investors.

The top funds over the past decade, including reinvestment of dividends, according to data firm FE FundInfo, in the global equity income sector are: JPM Global Equity Income (230% return); Guinness Global Equity Income (230%); Aegon Global Equity Income (202%); Aviva Investors Global Equity Income (201%); and BNY Mellon Global Equity Income (199%).

In the UK equity income sector they are: Premier Miton UK Multi Cap Income (140%); Royal London UK Equity Income (125%); Man GLG Income (123%); Schroder Income (115%); and FTF Martin Currie UK Equity Income (114%).

The typical global equity income active fund returned 142% versus 82% for the average UK equity income fund. 

Morningstar noted that a key driver of success was bets on the healthcare and technology sectors, which have delivered impressive performances over the past decade.

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Interactive investor recommends Fidelity Global Dividend, Morgan Stanley Global Brands Equity Income and Royal London UK Equity Income as income options for investors on its Super 60 Investment Ideas list.

The biggest driver of active funds’ failure is their inability to survive, which is often a result of lacklustre performance. This can be explained by a mix of wrong stock-picking decisions and the compounding negative effects of higher fees relative to their low-cost passive competitors, according to Morningstar.

Comparing mortality rates between active and passive funds shows that the latter have had better odds of surviving over the long term. Morningstar analysis showed that the 10-year survivorship rate for active funds averaged 46% from 2014 to the present.

Over the same period, the average 10-year survivorship rate for passive funds was 60%.

In the case of fixed-income funds, the 10-year survivorship rate for active funds has averaged 47% compared with 62% for passive peers.

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Typically, success rates for active managers are higher in equity categories focusing on the mid-sized and smaller companies.

Active funds also have higher odds of success in stock market categories where the average passive peer has a biased exposure to a specific economic sector. A classic example is the Norway equity category, where passive funds are top-heavy in terms of individual names and come with a high exposure to the energy and financials sectors.

Interactive investor recommends a number of passive funds on its Super 60 list. These include Fidelity Index UK for British stocks, Vanguard FTSE UK Equity income for British dividend-paying shares, Vanguard Global Bond index for global bonds, the iShares Core MSCI World ETF for global stocks, the Vanguard FTSE All World High Dividend ETF for global income shares and Vanguard US Equity Index for US shares.