Annually, the Multi-Manager team at 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 ninth edition of PassiveWatch is based on Lipper Global data as of 31st December 2022 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.
- Performance of active funds beat passive in every market in the UK over a 20-year period
The PassiveWatch survey 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. In the UK sector, the best-performing active fund outperformed the average passive fund by 2.5 times. Even in the weakest market observed, Asian equities, the best active still beat the average fund by 1.6 times. In summary, in every market it would have been worthwhile identifying the best active fund in the market, rather than passive.
- Performance between the best and worst passive funds is more pronounced – in the case of the US, the largest in 5 years
The analysis showed that due to the different choice of index benchmark, geographic location, gearing, currency and tracking methodology, the disparity between the performance of the best and worst passive funds has become more pronounced. The largest dispersion was for the Equity US sector with a range of 62.9 percent, the largest in five years, highlighting the importance of carefully choosing the best index and passive manager. The increased variability in returns is often due to country or style indices, highlighting the opportunity for the ‘active’ passive fund investor.
- It was a year of change for the peer group ranking of the largest passive funds
PassiveWatch reviews the largest four passive funds by AUM for each sector as at 2022-year end and calculated their percentile rank on a rolling five-year basis to identify the points when passive outperformed and underperformed their respective Lipper peer groups. The most interesting observation was that the volatility of the passive funds was high across recent periods for all the major indices with GBP Corporate Bond climbing from a low 78th percentile at the end of Q2 2022 but has since surged to finishing 36th percentile. Equity Asia proved to be a fertile ground for active management with the passive average mostly below 55th percentile.
- US market has the highest proportion of passive funds
Of the 1,763 funds in total registered for sale at the end of 2022, 499 of these were passive vehicles (457 last year). Out of the seven sectors surveyed, the Equity US continued to dominate by having highest proportion of passive funds with 155 of its 424 fund passively managed. The sector with the lowest proportion of passive funds was Bond GBP Corporates, where 27 of 132 funds were passively managed.
Rob Burdett, Head of Multi-Manager at Columbia Threadneedle Investments comments:
“The dispersion ranges between the best and worst passive funds were very pronounced in 2022 and in the case of the US, the largest in five years. This highlights the importance and value of identifying the best active funds in the market, rather than just only holding passive funds. 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.”