AJ Bell Active v Passive Report 2021

Longer term performance

“While the wide-ranging underperformance of active managers in 2021 tells us something about market conditions over the course of the year, such a short period of time can’t tell us too much about the long-term value of active management. Even for a skilful active manager, the question of performance over the course of a year would be little more than a coin toss. Looking over the longer term, active managers have done a better job than in 2021, though outperformance has still been scarce in the US and Global sectors. There is some survivorship bias in the numbers too, and while in theory this might apply to both passive and active funds, in reality it’s much more likely to positively skew returns in the active segment and can be expected to exert greater upward pressure on the performance figures the longer the time period under inspection.

“The fact that over 10 years only 56% of active funds have beaten a passive alternative, despite a tailwind from survivorship bias, demonstrates that investors need to be picky when it comes to buying active funds, and perhaps the regions in which they choose to allocate to active managers. Around a third of the funds in our 2021 sample sit in the Global sector, reflecting its popularity amongst investors, and that means the fortunes of funds in this sector have a disproportionate effect on the picture for active and passive funds taken as a whole. Active funds in other sectors have fared considerably better though.

“Overall, it’s clear that Global and US sectors have been the place to be over the last ten years, and investors in underperforming active funds might take some consolation from the fact that simply allocating to these sectors has likely been more important in generating returns from fund selection in other areas.”

Sources: AJ Bell, Morningstar, total return in GBP to 01/12/2021

Active managers have prospered in the UK

“The UK has been a particularly good home for active managers, with the average active fund returning 134% compared to 95.6% from the average passive fund over 10 years, a significant differential that cannot easily be explained by survivorship bias alone. There are some other factors in this sector which can go some way to revealing why active managers have performed so well against passive alternatives though.

“The IA UK All Companies sector is home to a significant number of funds which focus on the midcap area of the stock market. Indeed, of the ten best performing UK funds over ten years, four explicitly target the FTSE 250 as their benchmark index, and many of the other top performing funds have a multi-cap approach which sees them invest heavily in small and mid-cap companies. Not only have small and mid-caps significantly outperformed the big blue chips over the last ten years, they are also a fertile hunting ground for active managers to pick out hidden gems, as they are not as well scrutinised by the wider market. The positive midcap effect on the outperformance of active managers in the UK is also exacerbated by the fact that some passive funds track the blue chip FTSE 100 index, rather than the wider FTSE All Share.”

Sources: AJ Bell, Morningstar, total return in GBP to 01/12/2021