The number of passive funds outperforming their active rivals has dropped in 2019, following the tough conditions of last year that helped them to outpace stock pickers, research by FE Trustnet suggests. 
Last year was a difficult one for market as issues such as the Federal Reserve’s tightening programme, the US-China trade war, Brexit and spluttering economic growth prompted market sell-offs.
As such, many active managers were wrong-footed and failed to beat the market. This means that index trackers rose up the sector rankings and beat many of their active peers.
Performance of UK sector vs index in 2018
Source: FE Analytics
FE Analytics shows that just under one-third of index trackers in the Investment Association universe were in the top quartile of their respective sector during 2018. Another 55.2 per cent made second-quartile returns.
In the IA Japan peer group, for example, 75 per cent of its index-tracking members were top-quartile last year, while the remaining 25 per cent sat in the second quartile.
However, it appears that 2019 has brought with it market conditions more conducive for active management as the majority of trackers in the Investment Association universe are currently in the third or fourth quartile year-to-date.
According to our data, just 9.4 per cent of trackers are in their respective peer groups’ top quartile in 2019 so far, with another 25.9 per cent in the second. Meanwhile, 54 per cent have made third-quartile returns and 10.8 per cent are in the fourth quartile.
Adrian Lowcock, head of personal investing at Willis Owen, said: “There could be a lot of different explanations for this, but basically trackers do well in a rising market as they naturally track the market higher whilst active fund managers tend to struggle during periods when markets are high, or after a long bull run as active managers avoid the areas that have gotten expensive such as some tech companies.
“Also, active managers incorporate a number of different investment styles but trackers are style-neutral, so whilst a market is driven by growth or momentum many funds may find their style out of favour. In 2019 we have seen more volatility in markets which takes the edge off the performance of passive funds and allows active managers to add value – they tend to do better in sideways markets.”
Source: FE Analytics
In terms of where the most change has come since 2018, IA Japan is the equity sector that has seen the biggest drop in the proportion of index trackers making a top-quartile total return. As noted above, three-quarters of its trackers were first quartile last year but none are over the year to date.
IA Europe Excluding UK has seen the share of top-quartile index-tracking strategies fall from 55.6 per cent in 2018 to zero this year while IA Global Emerging Markets has witnessed a shift from 50 per cent last year to zero today.
There’s also been a significant change in the outperforming trackers in the IA UK All Companies sector. Last year, just over one-quarter of passive funds were top-quartile but this has dropped to 2.8 per cent year-to-date.
Indeed, the only passive IA UK All Companies member of the sector at the top of the 2019 does not have the typical approach in tracking mainstream indices like the FTSE All Share or the FTSE 100.
It’s the L&G Ethical Trust that tracks the EIRIS Filtered FTSE 350 index, which is a list of UK companies that meet a range of ethical and environmental criteria.
L&G Ethical Trust has made 15.47 per cent over 2019 so far, compared with 12.63 per cent from its average peer. However, it has been beaten by a number of other ethical IA UK All Companies funds, including Investec UK Sustainable Equity (21.86 per cent), Liontrust UK Ethical (19.41 per cent), Aberdeen Responsible UK Equity (18 per cent) and Royal London Sustainable Leaders Trust (16.93 per cent).
Likewise in the IA Global sector – which has been attracting a swell of inflows for much of the recent past – the proportion of outperforming trackers has fallen in 2019.
Last year, 20 per cent of its passive members were in the top quartile and 7.3 per cent were in the second. This has dropped this year to 5.9 per cent in the top quartile and 35.3 per cent in the second.
L&G Global Infrastructure Index is the only member of the peer group in the top quartile this year with an 18.14 per cent total return. L&G Global 100 Index Trust, Fidelity Index World and Quilter Investors Global Equity Index are among those making second-quartile returns.
Of course, the above is over a short time frame and does not mean that active funds are set to outperform index-tracking strategies for the rest of 2019.
The latest data from the Investment Association shows that tracker funds under management stood at £201bn at the end of April 2019, meaning their overall share of industry funds under management is 16.3 per cent.