Active funds have performed less during the Covid market stress, the watchdog found

Europe’s active fund managers have failed to exceed their standards during market turmoil following the onset of the Covid-19 epidemic, according to new research from European market surveillance shows.

Active managers have attributed the shift to passive funds for a relatively majestic market environment in recent years. However, investigations weaken the claim of active managers that they lose passive funds in difficult market conditions.

The European Securities and Markets Authority said that “the assumption that active equity utilities exceed their benchmark in a stressful market situation.” [ . . . ] Don’t hold back. “

The study, which is part of Watchdog’s efforts to support investor protection objectives, looked at the period between February 19 and June 30, 2020.

A three-and-a-half-month period saw the first strong wave recession in Europe, followed by “rapid recovery” of equity prices and “stabilization at improved levels.”

Esma said it was “unable to detect a clear net outperformance of active funds compared to the full-time prospectus benchmark”.

Performance variations occurred when the analysis was divided into shorter six-week periods covering stress, recovery, and stability.

Active funds underperformed their benchmarks by an average of 6.6 percentage points (annualized) during the initial period of stress as of March 31, with 54.6 per cent of funds underperforming their benchmarks.

“Specifically, in the last week of March, where the pressure was greatest, the benchmark-adjusted return for active equity Ucits was minus 0.9 percent vs. the prospectus benchmark,” Esma added.

During the recovery period until May 19, active funds performed 1 percentage point lower, with 53.6 percent failing to meet their criteria.

The performance of active managers has further improved in the final period of recovery as of June 30, with average benchmark outperformance posting 9.8 percentage points, with only 32.1 percent of funds performing low.

Researchers looked at Morningstar data covering 2,849 actively managed equity Ucits funds, excluding funds including benchmarks that include emerging markets, products and real estate.

Dewey John, head of research at Refinitive Lipper UK and Ireland, said active managers were “generally not smart enough” to sell out of position or hedge their portfolios with cash or derivatives when the market declines in 2020.

However, John said that it is not the job of equity managers in large cash positions to provide exposure to their investors in certain market areas, both for better and for worse, even if it makes frustrated investors “active” because of the perceived opportunity for outperformance in a declining market.

Esma’s investigations carry out previous research by Morningstar which suggested that active managers failed to surpass their inactive peers in the first half of 2020.

“Theoretically, the early 2020 volatility caused by the coronavirus epidemic should have been an opportunity for active fund managers to deliver additional returns once in a decade, protecting investors from a bad fall in the global market,” Morningstar analysts wrote.

“Practically, about half of active stock funds and one-third of active fixed income funds have outperformed their average passive peers in the first six months of 2020,” Morningster concluded.

But Esmar’s research proves that quantitative fund analysis helps investors choose better-performing funds.

Watchdog found that the asset-weighted average return of active funds was higher than the equivalent-weighted average in each of the three six-week periods tested. An asset-weighted average better reflects how large funds have performed.

Quantitative analysis with ESMA was further encouraged by comparing how funds with different Morningstar Star ratings performed during this period. These ratings divide the funds into quintiles based on their historical risk-adjusted income.

Esma sees that “overall, throughout the entire period, the funds belong [star] Their prospects were always higher in terms of benchmarks than funds with lower ratings, ”he said.

But only the funds with the highest five-star ratings exceeded their criteria “journalistically” between the end of February and the end of June.

* Ignites Europe is a news service published by FT experts for professionals working in the asset management industry. It covers everything from new product launches to regulations and industry trends. Trial and subscription available igniteseurope.com.

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