Active fund managers outperforming passive funds as COVID reverses their fortunes

by | Feb 8, 2021

  • Last six months sees UK large-cap active funds return 8.3%, passive funds just 5.1%
  • FTSE 100 rose 6.2% over same period

UK Active fund managers have outperformed passive funds over the last six months as the Covid-19 pandemic reversed several years of underperformance says Bowmore Wealth Group, the wealth manager.

A study by Bowmore found that actively-managed UK large-cap equity funds returned an average of 8.3% over the last six months, compared with an average of 5.1% for UK large-cap passive equity funds. Bowmore’s study covers 750 UK large-cap funds as defined by Morningstar*. The FTSE 100 returned 6.2% over the same period.

The firm says that greater exposure to value stocks may have helped active fund managers outperform in the second half of 2020. Data from Morningstar shows that value investing – a strategy centred on investing in shares that are trading below their book values – made a major comeback late in the year after having been out of favour since the last credit crunch.

Since the announcement of vaccine breakthroughs in November 2020, a recovery in the oil price has fuelled share price rises for undervalued oil & gas companies, helping value strategies to make up for ground lost to growth strategies since the start of the pandemic. Bank shares have also outperformed in recent months, contributing to a growing group of investors considering a rotation out of growth and into value, favouring active managers.

Bowmore says that wealth managers whose clients rely primarily on index-tracking funds are likely to have delivered suboptimal returns in 2020. Bowmore itself says that while passive funds have a part to play for most investors, the best active managers should deliver outperformance during falling markets.

Bowmore themselves have delivered outperformance, relative to their benchmark ARC**, for their clients during the period placing emphasis on their ability to react quickly to the fundamental shifts in economic and investment trends as a result of the pandemic was key to ensure positive performance for clients during 2020.

The firm explains that a relatively small number of high-conviction trades during the pandemic was key to its outperformance. These trades include:

  • Increased allocation to the UK market, having been underweight for several years. Bowmore believed the UK market was relatively undervalued pre-pandemic and the pandemic presented further opportunity to buy in at attractive levels.
  • Used a number of ETFs to capture value when markets were at significantly lower levels including purchasing a S&P 500 ETF when the index was at 2500 points and a FTSE 100 ETF when the index was at 6500 points.
  • Replacing more general global equity exposure with a specific allocation to a technology fund that rose significantly during the year.
  • Adding European exposure at the beginning of November, after having held no exposure to Europe for more than two years. European markets rose over 10% in November and December.
  • Ensuring their property exposure was well diversified to include logistics and distribution. Whilst may felt property would ultimately suffer, parts of the property market have been able to prosper.

Charles Incledon, Client Director at Bowmore, comments: “2020 was not the year to rely solely on passive funds. Not all active fund managers can beat the market, but the best active managers continually demonstrate that they can. It’s vitally important to have those funds in your portfolio when markets are falling, as much of the outperformance tends to come from downside protection”.

“Times of turbulence are when conviction trades really matter. The pandemic has created a situation where there are significant winners and significant losers. Our job is to identify both and adjust our clients’ portfolios accordingly. Tracking an entire market in this type of situation means you will benefit from the winners but will also suffer as a result of the losers. Therefore, now more than ever, being selective is vital”.

“The value of conviction applies to wealth managers as well as fund managers. We have outperformed our benchmarks and our peer group by making selective trades as a result of well-informed asset allocation calls.  Telling our clients to sit tight whilst we do nothing was not an option for us when a seismic shift in economic trends and conditions was occurring. They have thanked us for that now”.

* Funds investing in shares in the top 70% of market caps. The average share in Morningstar’s UK large-cap funds has a market cap of at least £1bn

** ARC is a peer group comparison tool designed to provide an understanding of the performance generated by discretionary private client investment managers.  The Indices are based on real performance numbers provided by participating investment managers and focus on high quality data with no model or synthetic data being used.

About Bowmore Wealth Group

Bowmore Wealth Group is an independently owned business based in London and Bristol, specialising in financial planning and investment management.

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