Active funds in the ascendancy, says leading multi-manager
Passive or ‘tracker’ funds – those funds that aim to track the performance of an index such as the FTSE 100 or S&P 500 – have seen exponential growth in recent years. They have also attracted regulatory support because of their lower costs. However, the multi-manager team at BMO believes that active investment managers may start to lead the way again.
Paul Green, investment manager on the team says: “We currently have our lowest ever exposure to passives. It is now under 20%, having been as high as 45% in the past.”
He points out that the number of passive funds in the major global Lipper sectors have increased by 400% and only a fifth of the passive funds now registered existed 10 years ago.
Research by the BMO multi-manager team suggests that the performance merits of passive performance may have been over-stated. Various pieces of research have shown that active managers, on average, tend to underperform the benchmark index over time.
The BMO research shows that for seven of the most popular sectors within the Lipper Global Universe, the top-performing active managers have delivered as much as three times their index benchmark over ten years. The sector where the fewest number of managers beats their benchmark is the North American sector. In contrast, the UK Income sector has the highest number of managers beating their benchmark.
Rob Burdett, co-head of the multi-manager team, says that the data showing stronger performance from trackers has been skewed both by the weight of money going into passive funds and the presence of ‘closet trackers’ – funds that charge active fees, but stick very close to the benchmark. This means that the performance of genuinely active funds may be only lightly represented in the figures.
He says the relative performance of active and passive funds tends to be cyclical – i.e. there are periods in the market that tend to favour active funds and periods that favour passive funds. A particularly strong run for one or the other may suggest that there is about to be a change in leadership. At the moment, passives are close to an all-time high in terms of relative performance. He believes this bodes well for active managers from here.