Research published today by Lyxor Asset Management, the French fund manager, reveals that active managers “fared fairly well” in 2017, particularly compared with their performance a year earlier, but the report’s authors warned that 2018 “promises to be more difficult”.
Some 44% of the active funds studied by the Lyxor researchers were found to have outperformed their respective benchmarks in 2017, against just 28% the year before.
The dispersion in relative performance was limited, however, as the data showed that over the 10 years to the end of 2017, only a quarter of the funds – or 25% of them – outperform their benchmarks.
The Lyxor researchers ended their report by advancing a case for an “optimal portfolio” consisting of 60% to 70% passive investments and 30% to 40% active funds. “What we learn from (these) 2017 results,” it says, is that “combining active and passive is key to generating long-term performance”.
The survey was based on data compiled from more than 6,000 active funds, which represented around €1.4trn in assets under management.
‘Fund-picking’s been hard lately’
One of the findings that may not come as a surprise to many investors, professional or individual, is that fund-picking was tricky last year, since, the study reveals, alpha generation has been concentrated in a limited number of funds and universes.
Still, Marlene Hassine, head of ETF research at Lyxor, noted that the low volatility and low correlation environment seen in 2017 has enabled more managers to outperform their benchmarks in 2017.
As for the active vrs passive debate, the Lyxor data shows some 47% of the active equity funds analysed outperformed in 2017, up from 26% in 2016, but down from 53% in 2015, while 39% of the fixed income fund bucket examined by the researchers beat its benchmark last year. This compared with 32% in 2016, and 33% in 2015, Lyxor said.
On the equity side, sectors in which active funds outperformed their benchmarks the most in 2017 were Italian large caps (81%), European small caps (72%) and German large caps (61%), followed by US small caps (57%) and Eurozone large caps (55%).
Thirty-eight percent of active French large cap equity funds, meanwhile, outperformed their benchmarks last year.
‘The five active equity sectors which outperformed the least’
The five active equity sectors which outperformed the least in 2017, according to Lyxor’s research, were Swiss large caps (37%), Spanish large caps (32%), US large caps (32%), UK all caps (30%) and Chinese large caps (24%).
Regarding fixed income universes, the Lyxor data shows “more extreme results” were observed.
And among the findings were that active global bond mangers were able to take advantage of their greater flexibility to outperform, relative to their underlying benchmarks.
Fixed income segments in which Lyxor saw active managers outperforming their benchmarks the most in 2017 were global bonds (67%), US corporate bonds (57%), and US high yield bonds (56%), while just 6% and 16%, respectively, of active Euro inflation-linked and Euro high-yield bond managers were able to beat their benchmarks.
Another finding to emerge, the Lyxor researchers noted, was in the area of active emerging debt – an environment in which alpha generation potential is thought to be high. Here, some 41% of managers were found to have beat their benchmarks in 2017.
How did the best managers perform in equity and fixed income? Lyxor’s research shows best equity active managers outperformed their benchmark by 6% in 2017 whereas this figure drops to 3% for the best active fixed income managers analysed.
A new dimension brought to Lyxor’s study has been the inclusion of the research into the construction of a suggested optimal portfolio.
The firm’s study has revealed 34% of the 6,000 active funds analysed outperform their benchmarks in any one year over the last decade. Hence the firm estimates an efficient portfolio would therefore be composed of 30 to 40% of alpha-generating active funds, alternative managers and niche stock pickers in segments in which risk premia is inacessible to ETFs.
This would be eventually combined with a 60% to 70% of passive funds whether they would be real passive strategies or active/smart beta ETFs to capture risk factors and market premium in a more efficient way.
A portfolio construction that is the opposite of the current breakdown seen in the global fund industry as outlined by Lyxor ETF research head Hassine since 74% of assets are managed into active funds against 26% in passive funds.
“Add passive funds and rely on a strong selection process to identify outperformers” was Hassine’s advice to investors.
“Every year we notice from the study’s results that the combination active/passive is able to create value. We thought proposing to the market the idea of an optimal portfolio will foster more interest on the passive/active blend, that for us is key to generate performance. For the time being, it is a theoretical portfolio,” she said.
According to Lyxor ETF research head Hassine, picking the right ETF could become as important as picking the right fund.
Lyxor’s senior fund analyst Philippe Mitaine added that “the debate between passive and active is not black or white. It depends on the asset class.”
He pointed out that in 14 out of 16 categories, Lyxor’s fund selection outperformed peers. But the performance against the categories’ benchmarks appeared more mixed (US equities, global, Euro and US high yield’s selection underperformed).
“We always struggle to find active managers beating the US indices, especially the S&P 500. It is not a coincidence if the first ETF was launched on US indice 40 years ago. Another asset class we underperformed the benchmark with our selection is high yield (global, US, Europe). Even passive managers do not perform in line with large HY indices. An explanation is that high yield market is not liquid and spreads are high, meaning transaction costs that are not considered in the benchmarks.”
Philippe Mitaine expressed a preference for unconstrained/flexible bond funds in which he said Lyxor invests very large assets.
“They are the only strategies to strongly underweight duration. Flexible bonds can lower duration to 1 or 2 years and can even have a negative duration. Only active funds can allow you this, putting in place strategies that are more difficult to set up with ETFs.”
Headquartered in Paris, Lyxor Asset Management is a wholly-owned subsidiary of Société Générale, which specialises in exchange-traded index funds and other ETFs, exchange-traded notes and various other investment products. It currently looks after assets under management or advice of around €20bn.
Last year, as reported, it launched what it said was thought to be Europe’s first ETF to focus on companies that led the way in terms of gender equality, via its Luxembourg-based SICAV structure.