More light cast on importance of fund selection

liquorice_allsorts_410Sixty per cent of active equity mutual funds on average failed to outperform their benchmarks over the past 20 years - though in some years as many as 60% also beat it.

Research by Lipper shows that the proportion of funds that outperformed benchmarks swung between 30% and 60% each year.

The findings serve to illustrate the importance of fund selection and may add to the debate about the merits of active versus passive investing.

The figures reflect success at outperformance by equity funds over the most recent three years to the end of December 2011 and for one, three and ten-year rolling periods over the past 20 years.

Outperformance also varied for funds investing in different regions. The proportion of outperformers ranged between 20% and more than 50% over different periods.

Active fund management remains the most successful type of investment management measured by asset size. Lipper figures showed that actively managed equity funds in Europe stood at just under €1.5 trillion, while index trackers had €160 billion and exchange-traded funds €139 billion. This means passively managed products make up less than 17% of the total pot.

The industry that has grown up to try and provide “prudent fund selection” is the funds of funds industry, says Lipper, and figures showed that in Europe assets under management stood at around €370 billion in this sector - still greater than the assets invested in passively managed funds.

Funds of funds investing solely in passive products have also begun to develop, with assets standing at €4 billion, mostly in the UK.

Ed Moisson, head of UK & cross-border research at Lipper, said: “Needless to say [the research findings] will not end the active versus passive debate, but it should make a useful contribution to understanding better how successful active fund managers have been in delivering on their objectives. Such insights can better inform this ongoing discussion.”

The universe of funds analysed included all open-ended mutual funds domiciled in Austria, Belgium, Denmark, Finland, France, Germany, Luxembourg, Liechtenstein, Ireland, Italy, Netherlands, Norway, Spain, Sweden, Switzerland and the UK. Absolute return funds and others with cash-like benchmarks were excluded.

©2012 funds europe