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.

Dont-write-off-active-management-Fig1-01-377409-CS2247-770px.jpg

Read the full report

 

Important Information:
This material has been issued by Schroder Investment Management Australia Limited (ABN 22 000 443 274, AFSL 226473) (Schroders) for information purposes only. It is intended solely for professional investors and financial advisers and is not suitable for distribution to retail clients. The views and opinions contained herein are those of the authors as at the date of publication and are subject to change due to market and other conditions. Such views and opinions may not necessarily represent those expressed or reflected in other Schroders communications, strategies or funds. The information contained is general information only and does not take into account your objectives, financial situation or needs. Schroders does not give any warranty as to the accuracy, reliability or completeness of information which is contained in this material. Except insofar as liability under any statute cannot be excluded, Schroders and its directors, employees, consultants or any company in the Schroders Group do not accept any liability (whether arising in contract, in tort or negligence or otherwise) for any error or omission in this material or for any resulting loss or damage (whether direct, indirect, consequential or otherwise) suffered by the recipient of this material or any other person. This material is not intended to provide, and should not be relied on for, accounting, legal or tax advice. Any references to securities, sectors, regions and/or countries are for illustrative purposes only. You should note that past performance is not a reliable indicator of future performance. Schroders may record and monitor telephone calls for security, training and compliance purposes.