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12 Apr 2019

Watch out for the industry’s one hit wonders

A good active manager is worth every penny, but they are increasingly hard to find. Marlène Hassine Konqui, Head of ETF Research, digs into her latest report to tell us more.

Our latest annual study into the performance of nearly 7,000 active funds vs. their benchmarks shows that the right combination of active and passive investment can help generate better returns. That said, finding an outperforming active manager has become much harder over the years. And even if you do find a winner in any given year, finding one which will do so again and again poses far more of challenge.

In other words, evaluating an active manager’s performance at a given moment in time only tells part of the story. To get the full version, you have to be able to gauge how likely it is that manager will generate alpha year after year.


How consistently do active managers outperform?

So how do the results stack up? Unfortunately, consistent outperformance has proven to be a very real challenge.

Over the 10 years we’ve been conducting our study, 33% of active equity and bond managers have, on average, outperformed over one year. The number more than halves to 15% by the end of the following year. And by the end of year 3, just 7% were still outperforming.


Average % of funds outperforming in year 1, 2 and 3

                   Image 1


The results are hardly more inspiring if you extend the period of time to three years. On average, 30% of active managers outperformed over three years, but only 17% continued to outperform in the following three years. And in the three years after that, just 9% carried on delivering. Whichever way you cut the data, the difficulty is clear.


Where were you most likely to find the outperformance?

When you look at how many times the average performance of a given investment universe was better than the benchmark over the decade to the end of 2018, it’s clear that some areas fared better than others. For instance, German, Italian, Spanish, EM and Chinese large-cap managers outperformed in six out of the past 10 years, but their Swiss and US large-cap equivalents only outperformed once over the same period. French large-cap managers underperformed every year.

In fixed income, global bond managers outperformed in six out of the past 10 years, while managers of euro govies, US corporates and EM debt funds only outperformed once in that period.


Frequency of outperformance by universe over the past 10 years and in 2018

     image 2


These results also run counter to the perception that supposedly inefficient markets are better sources of alpha. For instance, European small-cap managers outperformed in four of the past 10 years, while their large-cap counterparts did so in five of the 10 years. Equally, euro high yield managers outperformed twice in the past 10 years, while euro corporate managers managed to outperform four times over the same period.


The many challenges of manager selection

Investors can choose from two routes in their search for consistent alpha. They can either seek to identify a manager able to outperform year after year, or they can attempt to ‘market time’ between different outperforming managers from year to year. No mean feat either way!

Good active managers clearly have a place in any portfolio but, as we’ve shown, the industry is rife with ‘one hit wonders’. Consistent alpha generators are few and far between, so we’d advise investors to spend more time evaluating the characteristics of, and the results from, each investment universe before deciding whether to go down the active or passive route. Once they’ve chosen the former, the next step is to make a thorough assessment of the manager’s skill and the likelihood he or she will be able to offer continual outperformance.

Read more in our annual research report by Marlène Hassine Konqui, Head of ETF Research, and Jean Baptiste Berthon, Senior Cross-Asset Strategist:

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Source for all data: Morningstar and Bloomberg, as at 28/12/2018. Past performance is not a reliable indicator of future results


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