A ‘damning’ year for active funds

Should we all just switch to passive ETFs?

Theo Andrew

a sign on a post

It seems like everybody is ready to stick the boot into active fund performance these days. Everywhere you look there is some sort of performance or fund flow analysis showing the outperformance of the ETF versus the traditional mutual fund.

The latest to publish such analysis was the investment platform Hargreaves Lansdown.

According to the research, which focused on UK and US equity managers, only 13.8% of active managers in the UK managed to outperform the FTSE All-Share, in part due to the index’s sizable weighting to the oil and gas sector.  

“The rise of responsible investing, it is now more common for UK equity managers to have lower exposure to this area of the market,” the reports author, senior investment analyst, Hal Cook said.

However, while 2022 was a particularly bad year, the research shows active fund underperformance extends on a one, five and 10-year basis.

The analysis resulted in Cook posing the question “should we all just switch to passive ETFs?”.

“This is all a bit damning for active funds: they seem to struggle to outperform with any sort of consistency and are becoming less popular over time. So, shouldn’t we all just switch? I’m going to continue to answer that with a no,” he said.

Cook added the performances are based on averages, and while some struggle to perform with any consistency, there are still some that do. Furthermore, he said the analysis only tells you if something underperformed, not by how much.

Despite this, Cook’s question is also one being posed more regulatory by investors. Passive funds continued to increase their share of the market in 2022, and despite falling markets the asset class continued to see net inflows, while active funds posted net outflows.

In fact, ETFs saw €80.1bn inflows in 2022 according to data from Bloomberg Intelligence, and outpaced mutual fund flows every month until November.

It also comes as the investment platform itself has recently found the virtues of ETF investing.

In May last year, Hargreaves Lansdown expanded its passive research arm to include ETFs in response to client demand and industry developments.

More recently, the group announced it was using ETFs in three multi-asset funds earmarked for launch in March. Although, investors will still be beholden to its hefty 0.45% platform fee. 

Nonetheless, the platform’s increasing involvement in ETFs is a sign the question might not be so tongue in cheek. Should we all just switch to passive ETFs?

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