Manager versus Machine: Just 27% of active funds have beaten a passive alternative this year

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Only 13% of UK active equity funds outperformed a passive alternative in 2022, thanks to higher mid and small cap exposure.

US active managers have had a relatively good year, with 40% outperforming.

UK investors in the S&P 500 have been given a get out of jail free card by weaker sterling.

The most expensive UK tracker fund is 21 times more expensive than the cheapest.

AJ Bell’s newly published Manager versus Machine report for 2022 shows that just 27% of active equity funds outperformed a passive alternative this year, down from 34% in 2021. Things look better for active managers over ten years, where 39% have outperformed apassive alternative, down from 56% in our 2021 report.

Laith Khalaf, head of investment analysis at AJ Bell, comments: “2022 has been an annus horribilis for active equity funds, especially those plying their trade in UK shares. In a year when stock markets have faltered, active managers might have expected to nudge ahead of the tracker funds that simply passively follow the index, but our latest Manager versus Machine report shows any such hopes have been dashed.

“One year is too short a time frame over which to make conclusive judgements, as even the best active managers will endure periods of underperformance. But the longer term figures suggest there are certain sectors where active managers have performed better than others, so investors might consider being selective around where they opt for passive exposure, and where they might have better success with an active manager at the helm.

“Where they do select active managers, investors need to tilt the performance odds in their favour, by conducting research to pick out managers with a proven track record of outperformance. That’s no guarantee going forward of course, but if an individual active manager has delivered outperformance over along period, that suggests they are skilful and not just lucky. That skilful fund managers exist is not incompatible with a large proportion of active funds underperforming a passive alternative.”