Marginal and short-lived European active fund outperformance during COVID-19 volatility
Even in the first half of 2020, active funds beat their benchmarks by less than one percent
The case that actively managed funds thrive during periods of volatility is flimsy after the product class achieved only momentary outperformance during the height of COVID-19, according to a report by the European Securities and Markets Authority financial institutions (ESMA).
The regulator said the actively managed European equity funds it reviewed – net of ongoing costs – did not on average outperform their corresponding benchmark indices during the period from February 19 to June 30, 2020.
“More than half of the active UCITS analyzed underperformed their benchmarks during the stressed period (between February 19 and March 31) and more than 40% during the post-stress period (between April 1 and March 30). June) “.
The research found that active funds, their associated benchmark prospectuses and major European equity benchmarks all fell in March 2020 and rebounded strongly through mid-May.
Between April 1 and May 19, a key mismatch was seen between active European equity funds and the benchmark Euro Stoxx 50 and Euro Stoxx 600 indices, with the former returning 11% and the latter 7% and 8% during the period. However, the performance of active funds was matched by their related benchmarks, meaning they did not outperform during this period.
ESMA said this inability to find active alpha continued during the stabilization period through June 30, with active funds, their benchmarks and major market indices all posting average returns of about 5%.
Source: ESMA and Morningstar
The only comparison that showed clear active alpha was against the Euro Stoxx 600 index, with active funds outperforming the European large-, mid- and small-cap equity index by 3% over the four-month period.
During the period of peak market stress in the last week of March 2020, active funds underperformed their benchmarks by 0.9% and the Euro Stoxx 50 by 4.4%.
Notably, active funds outperformed their benchmarks and the Euro Stoxx 50 after the recovery and stabilization periods – but only with margins between 0% and 1%.
Source: ESMA and Morningstar
ESMA commented: “The finding of no sustained outperformance for active funds, throughout the first half of 2020, is consistent with the results of recent analysis and financial news focused on the unfolding of the COVID-19 crisis.
“Morningstar’s Asset/Liability Barometer shows that only about half of active equity funds outperformed their average passive counterpart in the first half of 2020.”
Interestingly, ESMA said the performance of active funds during the pandemic varied widely across domiciles, with S&P Dow Jones Indices’ SPIVA Europe dashboard showing that 34% of active equity funds domiciled in France underperformed their relevant benchmark against 55% and 61%, respectively, in Italy and Spain.
The regulator’s findings are damning to one of the active community’s main calling cards – that the generally higher costs of their funds may be justified by their ability to be more nimble and outperform the market in downturns.
Their failure to do so by any noticeable margin should raise serious question marks, especially when compared to the year following the volatility of COVID-19 and the years before it.
The recent SPIVA Europe dashboard highlighted how the percentage of European equity funds outperforming their benchmark increased by 37.4% between 2020 and 2021.
“From this, we can assume that on average, fund managers in this region may have used their skills better in more volatile market conditions than in a relatively stable environment,” said Andrew Innes, head of of Global Research and Design, EMEA at SPDJI.
“However, as SPIVA often witnesses, any short-term success usually dissipates as the time horizon increases.”
As evidence, 83.2% of euro-denominated European equity funds and 74.2% of sterling-denominated European equity funds have been beaten by their respective S&P benchmark over the past 10 years to the end of 2021.
More worryingly, only 53.2% of the 1,085 euro-denominated European equity funds and 39.8% of the 93 sterling-denominated European equity funds survived this 10-year period.