How to find the right blend between active and passive? Paris-headquartered Lyxor Asset Management has tried to answer the question by conducting its annual research on best and worst performing active managers.
For the 2016 edition, some 3,871 active funds distributed across Europe covering 15 asset classes and gathering almost €1.3trn in assets under management have been compared to their benchmarks over a one, three, five and ten-year periods.
The study found out that in 2016, only 28% of the active funds surveyed have been able to outperform their benchmarks against 47% in 2015.
Over a 10-year period, the figure drops to 19% of active funds beating their benchmarks.
“The results of this research could help for the construction of a portfolio. 2016 was rather difficult for active managers. They have faced the worst start ever with the market trough in February and they struggled to regain confidence after that. We shall note there has been a big shift in focus from economics to politics (Brexit referendum, Trump’s election). In addition, active managers have failed to capture trend reversals that occurred in the second half of 2016”, argued Marlene Hassine, head of ETF Research at Lyxor, during a press briefing in London.
Another finding highlighted is that an average 27% of the equity active funds and 31% of the fixed income active funds monitored have achieved outperformance last year.
Top performing universes for active managers over one year were French mid and small caps (61%), European small caps (56%) and Euro corporate bonds (44%) whereas French large caps (5%), global emerging markets equities (12%) and value equity (17%) have had the lowest percentage of funds outperforming their benchmarks.
Within the French small and mid caps universe, the best 25% of active managers outperformed their benchmark by 11.5%. However, on average, active managers in this area have underperformed their benchmark by 2.9%.
As for European small caps, the best 25% of active managers studied outperformed their benchmark by 8.6%. But on average, European small caps active managers have underperformed their benchmark by 1.2% last year.
Looking at the factor analysis, Lyxor’s research found out that active managers who succeeded in outperforming their benchmark were those that were overweight on the “value” (low valuation) risk factor in their allocations at the expense of low-beta, quality and momentum factors which has supported 2015’s performance.
What is the outlook for 2017? Only 34% of the 3,871 active managers surveyed have outperformed their benchmark in the first quarter of the year, Hassine revealed.
Hassine said the backdrop for alpha generation could improve this year but could also create more risks. Political uncertainties, particularly in Europe, are likely to make the task of investment managers harder in 2017, she added.
She highlighted that the changing environment could lead to the rise of opportunities at sector, thematic as well as smart beta risk factor allocation levels.
Hassine further explained a current optimal portfolio would be made of 70% of passive strategies and 30% of active funds, based on the findings of Lyxor’s research.
The study did also compare the performance of active investment funds in Europe with smart beta indices created using criteria that do not rely on market capitalisation. The result was that only 13% of active funds beat the smart beta index, “reinforcing the position of smart beta as a vital mainstay for investors”.
According to Lyxor’s data, in 2016, smart beta indices have outperformed 89% of the active managers in the US, Europe and Japan universes. The figure increases to 98% when the comparison is made over ten years.
In order to optimise investors’ portfolio construction, Lyxor Research has developed a quantitative model for monitoring market trends to enable dynamic factor-based allocation.
The tool has been integrated in the fund analysis process of Lyxor’s fund selection unit.
During the press briefing, Nicolas Moussavi, Lyxor’s head of Mutual Fund Research, said it was not possible to monitor the 40,000 funds authorised for sale in Europe, therefore the model developed by the firm helps the team to highlight a fund’s positioning and to classify it based on its style biases.
“It provides a relevant initial breakdown of the style and philosophy of a fund’s management, thus enabling us to go into greater depth with the manager regarding certain aspects found in this initial phase of analysis. This factor-based approach proves highly complementary to a more traditional qualitative approach,” he commented.
