Ahead of the pack

Image

Most investment companies beat their benchmarks according to new research from analysts at Canaccord Genuity. The bank’s investment companies team crunched the numbers on the performance of hundreds of funds over the past five years, concluding that almost two-thirds (64 per cent) came out ahead of their benchmark indices.

That’s a significant finding given the ongoing debate about the merits of active and passive fund management – the enormous inflows into passive funds seen over the past three years reflect a widespread belief that the higher charges of active funds aren’t worth paying given their performance record. Canaccord Genuity’s research, however, suggests this hasn’t been the case for investors in almost two-thirds of investment companies, all of which are actively managed.

Moreover, in some sectors, the number of outperformers is even higher. 90 per cent of investment companies investing in UK smaller companies beat their benchmark, while 88 per cent of Japan specialists did the same; 82 per cent of UK equity income funds outperformed, and 77 per cent of emerging country funds came out on top.

Even North American funds performed very strongly, with 67 per cent beating their benchmark. That may surprise some passive investors – the conventional wisdom about investing in US equities is that the market is so closely followed and well-researched that it operates very efficiently, making it tough for active managers to outperform. Passive investment has become the default option for many investors in US shares in recent times.

There were, however, pockets of the investment company sector where funds found it tougher to beat the market. Only 45 per cent of sector specialists beat their benchmarks, although this is such a disparate sector that comparisons may be less meaningful. More surprisingly, only 38 per cent of global emerging markets funds outperformed and the figure amongst global equity income funds was only 33 per cent.

The former case isn’t easy to explain, though emerging market volatility does mean there is greater scope for divergence from the market – above or below benchmark performance. In the case of global equity income funds, Canaccord Genuity says investment company managers have often tended to hold more UK equities than other managers in their global portfolios; since the UK market has underperformed other major markets – notably the US – this has held some funds back over the past five years.

Nevertheless, the underlying message of this research is that in the investment company sector at least, actively-managed funds have consistently outperformed the markets in which they invest – and since passive funds can only mirror the market, this means they’ve come out on top against the index trackers too. Advisers and investors would have had to pick their funds more carefully in some markets than others to be sure of securing this outperformance, but in every sector studied, a sizeable number of investment companies did better.

There is, of course, room for both passive and active funds in the portfolios of many investors. But those who reject active management out of hand as overpriced and underperforming should take a look at these numbers.