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Best active managers deliver six times more than passives

Active_vs_PassiveThe best active equity managers have delivered as much as six times the returns of benchmarks that passive funds track over a 20-year period, research shows.

The multi-manager team at BMO Global Asset Management found that the average active fund has outperformed the average passive fund in three out of the five Lipper Global sectors, where comparison is made possible by the passive funds having had a 20-year track record.

Active and passive funds across the UK, Europe, Asia, US and Japan were studied and it was found that over a 20-year period the average active fund outperformed the average passive fund in the UK, Europe and Japan. Funds investing in global emerging markets and sterling corporate bonds were excluded from the analysis as there were no passive funds on offer in these two sectors 20 years ago.

In the US category the best performing active fund outperformed the average passive fund by a multiple of 6.3 times. In the UK it was 5.9 times and in Asia it was 2.9 times.

Rob Burdett, co-head of BMO Asset Management’s multi-manager team, said there was a role for both active and passive in any sensible investing period, but that the research highlighted “there is alpha to be found in active”.

He said: “Choosing the right managers and exposures in passive is also imperative, and passives can play an important role in reducing overall cost and adding diversification.”

The firm’s ‘PassiveWatch’ report also showed a “vast performance range” between the best and worst performing passive funds.

Over just one year for the period ending December 31, 2018, the best and worst passive funds in the Lipper Global Equity US sector range from a positive 9.8% return, to an 11.1% loss. The sector with the highest dispersion was equity emerging markets global, with a difference of 24.7% between best and worst performing fund.

The lowest dispersion of returns was the equity Europe sector, with a dispersion of 2.6% between top and bottom.

Factors that are influential on performance include the choice of index benchmark, manager charges, dividend policy, gearing, currency hedging and tracking methodology.

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