The highly anticipated European S&P Indices Versus Active Funds (SPIVA) mid-year scorecard was published this week and it made for grim reading for UK active fund managers.

According to the report, 96% of UK large and mid-cap equity managers underperformed the S&P United Kingdom LargeMidCap index in H1 2022, taking the three-year underperformance rate to 75%.

However, it was a different story for US-domiciled investors with just 51% of large-cap equity managers underperforming the S&P 500 in the first half of the year, putting them on track for their best performance since 2009.

While UK equity funds’ poor performance was blamed on managers looking to “spice” up their portfolio by stock picking lower down the market cap, large cap US equity fund managers were able to take advantage of the wide dispersion between the best and the worst performing stocks.

Data from S&P Dow Jones Indices (SPDJI) said dispersion in the S&P 500 has been trending higher since 2017 and is on track to hit its highest level since, you guessed it, 2009.

“With dispersion currently on track for its highest average annual reading in over a decade, it is perhaps not coincidental the last time we saw this level of outperformance for large-cap domestic equity funds,” Tim Edwards, managing director of index investment strategy at SPDJI, said.

The S&P 500 slid 20% in the first half of the year, with many of the blue-chip tech titans underperforming, potentially giving active managers a better chance of beating the market.

Despite this, European-based fund managers investing in large-cap US equities were unable to take advantage of the dispersion, with 70.6% of active funds underperforming the S&P 500.

While partly attributable to a domestic bias, Edwards said currency hedging could be playing a key role.

“If you hedge your currency exposure in the US this year that has hurt you. It has been one of the top three worst years for sterling in the last 20 years and the pound or euro does not buy a lot of US dollars anymore,” he said.

More urgency required for consolidated tape

Regulators have been urged to have more drive in bringing a consolidated tape to Europe with its absence being felt across the ETF ecosystem.

In September’s ETF Insider, Keshava Shastry, head of capital markets at DWS, said the lack of real-time consolidated tape is causing Asian, Latin American and in some cases European investors to allocate capital to US ETFs, despite the advantages of a UCITS wrapper.

He added it is also directing capital away from small and mid-cap stocks, hindering potential growth prospects for the sectors.

“This is not a technology problem. This is a governance, fragmentation and data quality complication that needs to be resolved,” he said.

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