Active funds may not outperform passive funds during tough times

Real-world study by the European Securities and Markets authority challenges a widely-held belief

Active funds may not outperform passive funds during tough times
Steve Randall

A new study questions a common belief about equity fund management, based on a real-world scenario.

The European Securities and Markets Authority (ESMA) research focused on funds regulated under the cross-Europe UCITS framework, which are considered relatively safe investments.

By looking at the performance of both actively managed and passively managed funds during two periods at the start of the pandemic, the report found that active funds did not consistently outperform passive funds.

During the ‘stressed period’ of February 19 to March 31, 2020, more than half of the sample of funds considered active funds (net of ongoing costs) underperformed their related benchmarks (on average).

For example, during the worst days of the crisis – the last week of March 2020 – active funds underperformed their benchmark by 0.8% while passive funds underperformed by only 0.01%.

During the ‘post-stress’ period of April 1 to June 30, 2020, more than 40% of active funds underperformed.

Exception to the rule

However, there is an exception. Those UCITS active funds that are the highest rated consistently outperformed their related benchmarks.

For the passive funds analysed, benchmark-adjusted performance hovered around zero or was clearly negative.

During the final part of this post-stress period, as the market stabilised, underperformance was seen in 32% of active funds.

It should be noted that the sample of funds used, totalling 3,155, was 90% active funds in both volume and share of total assets, although they are smaller than the passive funds included (around half the size on average).

The study authors caveat their findings by acknowledging that it is focused on a period of financial market stress, while most funds take a much longer-term perspective on their investments.

They also note that further research is needed to determine additional drivers of performance dynamics, and to account for market and asset class variations.