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BMO GAM (EMEA) Multi-Manager PassiveWatch: Best-performing active fund outperformed the average passive fund five-fold in 2021

Annually, the Multi-Manager People team at BMO Global Asset Management (EMEA), part of Columbia Threadneedle Investments, review the passive industry, identifying trends on investor appetite, performance relative to active managers and how investors are using passives in constructing portfolios. The eighth edition of PassiveWatch is based on Lipper Global data as of 31st December 2021 across seven sectors: Equity UK, Equity Asia Pacific ex Japan, Equity Europe ex UK, Equity US, Equity Japan, Equity Emerging Markets Global and Bond GBP Corporates.

Key findings:

  • The best active equity managers have delivered as much as five times the average passive fund over twenty years

The analysis reviewed both active and passive funds over a 20-year period, comparing the performance of the best fund in each sector against the average fund, the index, the average passive return and the best passive return. The most striking observation was the scale of the outperformance of the best-performing fund. In the UK sector, the best-performing active fund outperformed the average passive fund by five times.

  • A vast range of performance between the best and worst passive funds

The analysis showed that due to the choice of index benchmark, charges, dividend policy, gearing, currency and tracking methodology there was a huge disparity between the performance of the best and worst passive funds. The dispersion ranges from 5.3 percent in the Bond GBP Corporates sector to 41.2 percent in the Equity US, highlighting the importance of choosing the best index and passive manager.

  • US market has the highest proportion of passive funds

Across the seven market groups surveyed, in 2001 there were a total of 76 passive funds. By the end of 2021 this had grown to 457, a six-fold increase. Out of the seven sectors surveyed, the US Equity had the highest proportion, with 144 of its 410 funds passively managed. The sector with the lowest proportion of passive funds was the Bond GBP Corporates sector, where 27 of the total 136 funds were passively managed. However, this was up from 11 percent last year, representing the growth of credit market passive instruments available to investors.

  • Supply chain disruption and the shipping market underpinned the best ETF returns in 2021

Since the global economic shutdown in 2020, supply chain disruption has dominated headlines. In 2021 investors soon learnt the difficultly of restarting supply chains. Breakwave’s Dry Bulk Shipping ETF tracks the price of dry bulk freight futures, which is the price of shipping commodities or large cargo. The cost of shipping spiralled as economies tried to catch up on lost output post-lockdown. Consequently, the fund was the top performer, returning an impressive 277 percent in 2021, highlighting the price inflation for delivering goods worldwide.

Rob Burdett, Co-head of the Multi-Manager People team at BMO Global Asset Management (EMEA), part of Columbia Threadneedle Investments comments: “Active funds in the UK sector outperformed the average passive fund by five times over 20 years to the end of 2021. This highlights the importance and value in the long term of identifying the best active fund in the market, rather than just going totally passive. This could especially be the case in volatile market conditions. Many investors choose exclusively between holding passive or active funds, often citing the higher fees of active funds as off-putting. We have always held the view that if you pick the right active fund, the excess performance should easily compensate for the extra cost. However, we do believe that passives can have an important role to play as part of an overall portfolio, primarily as a means of reducing overall cost and adding diversification.”

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