Around 80 per cent of UK equity funds have outperformed the benchmark in the 12 months to mid-2017 as managers put a difficult 2016 behind them, according to analysis by S&P Dow Jones Indices.
The latest biannual S&P Indices Versus Active Funds (SPIVA) Europe Scorecard revealed improved short-term performance for actively managed UK equity funds, although longer-term performance remains an issue.
Many managers were caught out by the style shift from growth to value stocks in 2016 as markets also adapted to several political developments including the unexpected UK referendum result in favour of exiting the EU and the election of Donald Trump as US president.
In 2016, 87.22 per cent of actively managed, equal-weighted funds lagged the S&P UK BMI index in what was a troublesome year for active managers. For the 12 months to mid-2017, however, performance has improved with 79.6 per cent of actively managed UK equity funds outperforming the index.
Indeed, actively managed funds broadly have seen big improvements in one-year performance compared with six months ago.
Conditions have helped as markets responded positively to the US election result, S&P Dow Jones Indices analysts noted. Globally, a more stable macroeconomic landscape has emerged with accommodative monetary policy supporting above-average performance and calmer markets, they added.
Performance of MSCI World over 1yr
Source: FE Analytics
Andrew Innes, associate director for research and design at S&P Dow Jones Indies and author of the report, said: “We have been in a risk-on environment where we’ve seen global equity markets soar. In such an environment, one would expect that size, namely small-cap stocks, would do well.
“Therefore, fund managers less exposed to larger companies may have found it relatively easier to outperform.”
Innes added: “We have seen in individual countries, where more active funds beat the benchmark, the average stock return typically beat the benchmark.
“This indicates that in general the performance of smaller companies did better than larger companies.
“Importantly, although 80 per cent of actively managed UK funds outperformed in the one-year period, over the 10-year period, the reverse is true: 70 per cent underperformed for all UK categories,” Innes (pictured) explained. 
Outperformance in the small-cap section of the UK market was notable, where more than 93 per cent of funds outpaced the S&P UK SmallCap index in the year to mid-2017 and were labelled the “real star performers”.
Only Danish equity funds – denominated in krone – boasted a better one-year performance than UK small-cap funds, where no funds underperformed the S&P Denmark BMI benchmark.
Innes explained: “In general, with small-cap investing there is a larger opportunity set, more scope for discovery and less efficiency.
“Over the short term, these actively managed small-cap funds in the UK have done particularly well at allocating to the successful styles and trending names in the market.
“However, this is difficult for the majority of funds to maintain over the longer term. Over 10 years the number of actively managed small-cap funds that underperformed is 74 per cent.”
Elsewhere, other sterling-denominated funds saw short-term performance strengthen to varying degrees, according to the SPIVA Europe Scorecard.
There was a slight improvement for Europe ex-UK equity funds, as 38.6 per cent outperformed the S&P Europe Ex UK BMI index in the year to 30 June 2017, compared with just 24.2 per cent during 2016.
Just 6.2 per cent of global equity and emerging markets equity funds beat their indices during 2016, S&P Global 1200 and S&P/IFCI respectively. Yet, by mid-2017 more than half of global equity funds (53.9 per cent) had outperformed the index over one year, while 40.61 per cent of emerging market equity funds outperformed.
There was a similar improvement for US equity funds, where 58.4 per cent outperformed the S&P 500 index in the 12 months to mid-2017, compared with just 32.7 per cent in 2016.
However, the SPIVA scorecard also revealed that long-term outperformance remains a challenge for actively managed funds.
While more than half of broad UK equity funds have done better than the index over three- and five-years periods, 71.8 per cent have underperformed the benchmark over 10 years – although this has come down slightly from 74.2 per cent at the end of 2016.
The average UK equity fund has however outperformed the index over 10 years, generating a 6.07 per cent annualised return against a 5.5 per cent for the benchmark S&P UK BMI.
Annual total returns of FTSE All Share over 10yrs
Source: FE Analytics
Sterling-denominated funds focused on other regions also failed to beat their benchmarks over the longer term.
With the exception of European equity funds, where around a quarter of funds have outperformed their respective indices over 10 years, long-term outperformance for actively managed global, emerging markets and US equity funds has remained low.
Analysis showed that just 20 per cent of emerging market equity funds have generated higher returns than the benchmark over 10 years.
However, in the global and US equity space underperformance was even more evident with just 6 per cent of funds in each sector beating their respective indices over 10 years.
While outperforming the S&P 500 over one year, US equity funds have lagged the benchmark over all other time periods. Indeed, over 10 years the average, equal-weighted US equity funds has generated an annualised return of 9.89 per cent compared with the S&P 500 of 11.94 per cent.
Innes explained: “Over the short term, funds can more easily align their portfolios with a particular style that works well in the current market cycle.
“However, to consistently adapt their portfolio and correctly time their exposures to the best performing factors across an entire market cycle is much more difficult.
“Once the compounded effect of active management fees are taken into account, looking over the past 10 years, we found the percentage of funds across each category in the SPIVA Europe Scorecard that underperformed the benchmark ranged from 72-98 per cent.
“Therefore, finding funds that will outperform their benchmarks over the long term appears to be the real skill.”