Where active funds are outperforming

There’s a strong temptation to think that stockpickers can beat the market when uncertainty arises, and that’s a thesis our latest cover feature (page 22) examines in depth. Poorly as active portfolios have fared against low-cost trackers in recent decades, there are some reasons to believe a change is due – not to least thanks to a shift in monetary policy. But picking winners, and those that can replicate their successes consistently, has always been a challenge.

Figures produced by assessors such as S&P’s ‘SPIVA’ scorecard tend to reflect poorly on active funds over various periods of time, with very few managing to beat the market in the longer run.

Nonetheless, an assessment of the funds available to UK investors, in particular those that have held up well over a given period, gives us clues about the trends driving returns in those markets.

So we have examined how many active funds in a variety of sectors have beaten the market, and what kind of portfolios have stood out.

It’s worth noting this is just a snapshot in time, based on us assessing funds in a broad Investment Association (IA) sector over a five-year period versus a widely used benchmark, from the FTSE All-Share in the UK to the S&P 500 in the US. A single performance timeframe like this can sometimes be unduly influenced by a given period (for example, three-year returns might be skewed by one very good or very bad year), but it’s worth noting where active funds have stood out, and which ones are turning heads.

Active track records by region

As we have discussed in previous analyses, looking at the proportion of outperforming active names in an IA sector arguably gives more generous results than the SPIVA process, in part because our approach can contain funds with disparate strategies. Funds in the IA UK All Companies sector often have a small and mid-cap bias that can at times put them nicely ahead of the FTSE All-Share index, for example.

However, not for the first time, active performance by these metrics manages to exceed low expectations. Funds in the IA Europe ex UK sector have fared especially well over a five-year period, with emerging market, US and Japanese equity funds also doing reasonably well. The figures for both Asian and UK equity funds, by contrast, are pretty dire. Unpicking some of the winners can give some clues to the leading market trends.

We have restricted this analysis to open-ended funds, given the volatility of investment trust shares may add further confusion to the results. We have also limited our focus to the main IA sectors rather than also turning to dedicated small-cap sectors.

Continental style

The FTSE Europe ex-UK index is riding high after a strong 2023, with a sterling total return of more than 40 per cent over the five years to 6 December. But a good proportion of active funds are currently holding their own well against such healthy gains. Liontrust European Dynamic (GB00B7T92B14), whose team judge companies using different metrics such as momentum and cash returns but who have tended to tilt the portfolio differently based on market conditions, has made nearly 100 per cent over the period. Another flexible fund, BlackRock European Dynamic (GB00BCZRNN30), which has a vaguely defined remit of seeking companies that are undervalued or have good growth potential but has benefited from this approach and deep resources, sits on a 77.1 per cent return despite a tough 2022. Funds with a focus on structural growth stories have also continued to stand out, from Premier Miton European Opportunities (GB00BZ2K2M84) to Marlborough European Special Situations (GB0001719730).

Turning to another sector not always popular with investors, it’s notable that around 60 per cent of the funds in the IA Global Emerging Markets sector are ahead of the MSCI Emerging Markets index over the period. Some of these names are certainly clinging on to big gains from earlier in the period – although investors might still be drawn to their approach.

One interesting example is Aubrey Global Emerging Markets Opportunities (LU1391034839). The fund has a punchy enough remit, “investing solely in companies which are entirely focused on the growth in consumption and services in emerging markets”. That helped it make some huge gains in the early part of the pandemic, although the portfolio had a rough 2022 in performance terms. With a big focus on India, China and consumer sectors, the fund may still appeal as a fairly pure play on the trends most closely associated with the emerging markets.

The success of active names in the emerging markets space does make it surprising to see Asia ex Japan funds do so poorly by contrast – although this may well illustrate the latter’s tendency to focus slightly more on Chinese stocks, which have weighed on performance in the past few years. While growth-focused names such as Baillie Gifford Pacific (GB0006063126) have clung onto their rich pandemic gains to an extent, funds with a very different approach also stand out. Jupiter Asian Income (GB00BZ2YMT70), a name that ignores China and focuses on regions from Australia to India and Taiwan, has held up very nicely in recent years, while Matthews Asia Small Companies (LU0871674379​​​​​​) continues to post strong returns. The Matthews Asia fund does have just over a third of its portfolio in Chinese stocks – although its approach takes it beyond the companies hit in the regulatory crackdown of recent years. The fund made a small sterling loss in 2022, but has posted chunky gains in the preceding three years and has tended to appear regularly in our separate analyses of small outperforming active funds.

Contrarian indicators?

Investors might spare a thought for the UK active funds trailing the FTSE All-Share over the period, bar a few names such as Artemis UK Select (GB00B2PLJG05) and Invesco UK Opportunities (GB0033031153) that have posted strong gains in part thanks to a value focus and the rewards that reaped last year.

By contrast, funds with a growth focus and a tendency to favour the likes of mid-cap shares – a grouping that captures a large part of the sector – have struggled. Such strategies, however, have tended to stand out in previous periods when UK-listed companies with strong structural growth stories powered ahead. Given the struggles seen by mid and small-caps of late, the hope is that such funds might prove a gateway into an underpriced part of the market.