French investment company Lyxor Asset Management, the open-architecture asset management subsidiary of Société Générale, has released the findings of its fifth research analysing the performance of active funds against their benchmarks.
Some 6,000 active funds were scrutinised representing €1.8trn in assets under management. A key conclusion is that fund picking has been hard in 2017 since the study reveals alpha generation has been concentrated on a number of funds and universes.
Lyxor has found out that 44% of the active funds monitored (i.e. 23 universes of European domiciled active funds across both equity and fixed income) outperformed their respective benchmarks in 2017, against 28% the year before. The dispersion in relative performance has been limited though. Over a 10-year period, from 2007 to 2017, only 25% of the funds outperform their benchmarks.
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.
Some 47% of the active equity funds analysed by the French company have outperformed in 2017 (vs. 26% in 2016 and 53% in 2015) while 39% of the fixed income fund bucket studied did beat the benchmark in 2017 (vs. 32% in 2016 and 33% in 2015).
On the equity side, sectors in which active funds outperformed the most their benchmarks 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%). 38% of active French large cap equity funds have outperformed their benchmarks last year.
The five segments in which active equity funds outperformed the least in 2017 according to Lyxor’s research were Swisslarge caps (37%), Spanish large caps (32%), US large caps (32%), UK all caps (30%) and Chinese large caps (24%).
Regarding fixed income universes, “more extreme results” were observed. Fixed income segments in which Lyxor saw active managers outperforming their benchmarks the most in 2017 have been global bonds (67%), US corporate (57%), US high yield (56%) while active Euro inflation-linked and Euro high yield bond managers were only 6% and 16% respectively to beat their benchmarks.
It highlights a reason for global bond active managers’ outperformance dwells their greater flexibility compared to their underlying benchmarks.
Lyxor’s study also suggests that 41% of active emerging debt managers, an environment in which alpha generation potential is thought to be high, have managed to take over 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.
Add passive
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.”
Lyxor has €20bn of assets under management or advisory.
