The recent challenges of active equity investing – and why this might change

Since the global financial crisis active equity managers have faced significant challenges, as we wrote in 2017. This trend has persisted in the past two years, spilling over into previous bright spots such as the UK and emerging markets. Yet, perhaps surprisingly, this kind of underperformance is not unprecedented; active management tends to be cyclical. The question for investors is whether anything is different this time and if active returns will recover from this low point.

Since Schroders published our paper on the case for active asset management in 2017, the performance of active equity managers has continued to face headwinds. In previous bright spots, such as the UK and emerging markets (EM), fewer than half of active managers have beaten the index. In the US, beating the index has been as difficult as ever (Figure 1).

At the same time, flows from active to passive have continued unabated. In August 2019, US passive equity mutual funds surpassed their active counterparts in assets under management. The shift to passive is less advanced in Europe, where active equity funds remain the dominant vehicle with 71% market share1.

In this paper we look at what could explain this performance, including drivers that have previously explained the relative performance of active management, such as factor exposure, market breadth, cross correlations and dispersion of stock returns. We show how a number of headwinds have coincided in recent years, damaging the performance of active managers.


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