Albemarle Street Partners’ research into ‘Active Payback’ found that just 18 out of 74 fund groups that met the metrics beat their passive counterparts during the second quarter, highlighting the need for investors to pay more attention to funds and groups with a high active share.
“The second quarter proved to be tougher for active managers given their general preference for the value style and their inherent tilt away from the largest stocks in the index. More broadly, this is related to the expectations of interest rate rises as the global economy recovers,” says AJ Bell head of active portfolios Ryan Hughes (pictured).
“Late last year, the vaccine breakthrough resulted in expectations of a rapid economic recovery that would force central banks to raise interest rates faster than expected, but as we moved through 2021, this expectation faded with rate rises now expected to come more slowly. This saw the market turn sharply back towards equities more sensitive to falling bond yields and saw many of the value tilted actively-managed funds take a step back after strong performance.”
Baillie Gifford delivers
However, the research, which calculates how much a fund has earned after fees over and above a passive comparison, highlighted Baillie Gifford as the group that has consistently delivered for its investors.
Baillie Gifford achieved the best average investor experience over both the past five years and the second quarter of 2021, with an Active Payback of £0.64 and £0.04 respectively.
Over five years, the firm was closely followed by River & Mercantile Asset Management and Aegon Asset Management. For the second quarter of the year, Marlborough Fund Managers and Aberdeen Standard Fund Managers rounded out the top three.
Fairview Investing director Ben Yearsley says: “It’s no surprise seeing Baillie Gifford top those tables. Ultimately if you are paying for active you need your funds to deliver outperformance versus a relevant benchmark over the medium to long term. I’m not bothered about short term out- or underperformance though.
“What has helped Baillie Gifford, as well as good stock selection, has been low fees – their active fees are much lower than many competitors.”
Leading the pack
Smaller company funds led the way – outperforming passive options over both five years and during the second quarter, as the IA UK Smaller Companies sector posted 97.73% of active assets outperforming their passive equivalent for both periods.
Albemarle Street Partners managing director Charlie Parker explains that this was fuelled by investors making cyclical bets in a diverse way as the value rally stalled.
“In particular by using smaller companies rather than just conventional UK large-cap value to capture the trend. So far, the value rally has been insufficient to shake the faith of investors holding onto growth,” he adds. “The key challenge for investors is whether the value rally is pausing for a classic summer hiatus or whether it has run out of steam. We would urge investors to pay attention to the seasonal factor – which often erroneously leads investors to down-risk in mid-summer.”
The IA UK Equity Income and IA European Smaller Companies sectors also performed well over five years and during the second quarter.
The worst performing sector over the past five years was IA North America, with just a third of funds outperforming the passive option. For the second quarter, the worst performer was IA Asia Pacific ex Japan, with only 27.72% of assets outperforming their active equivalent.
The importance of high active share
For Hughes, the Albemarle Street Partners report demonstrates the importance of using active managers with a high active share.
“Baillie Gifford pay no regard to the index they are trying to beat in their portfolio construction, while smaller companies funds also typically have a high active share,” he says. “Both have proven to be highly successful in beating the passive benchmarks over the past five years and indicate if you want to beat the benchmark, you have to be prepared to do something different to it.
“It’s an obvious statement but, as we know, a vast number of actively-managed funds are simply closet trackers with higher fees.”
