AJ Bell’s Manager versus Machine research for H1 2023 shows active managers strike back after a ‘dismal’ 2022

by | Aug 1, 2023

AJ Bell’s newly published Manager versus Machine report for H1 2023 shows things have picked up for active managers, after a bleak 2022. Highlights include:

·       44% of active equity funds outperformed a tracker in the first half of 2023, up from 27% in 2022

·       Only a third of active global funds beat a passive machine

·       Apple and Microsoft now individually matter more to global stock market performance than the Footsie

·       After ten years, a £10,000 investment in one of the most expensive UK tracker funds is today worth £1,660 less than the same amount invested in the cheapest tracker

A full copy of the report is available on request or can be accessed here.

Laith Khalaf, head of investment analysis at AJ Bell, comments:

“Active equity managers fought back in the first half of this year after a dismal 2022 when just over a quarter managed to scrape past a tracker fund. To be honest, things couldn’t have got much worse without testing the laws of statistics. 44% of active managers outperformed a tracker in the first six months of 2023, a substantial improvement to say the least.

“The active versus passive battle is increasingly being won by tracker funds, if the investment industry’s fund flows are anything to go by. Our longer term analysis shines a light on one of the factors driving this trend: only 38% of active equity funds have outperformed a passive comparator over the last ten years, which isn’t exactly a great sales pitch for active funds. 

“A lot of this can be put down to a poor showing from global funds, where just over one in five have beaten the passive machines over the last decade. However, there are long-running market trends which provide some mitigation for active managers, in particular the dominance of US tech stocks. There are now a cluster of large technology companies which make up a larger proportion of the global stock market than entire European stock exchanges that have been around for centuries. As things stand today, Apple and Microsoft each individually matter more to the performance of the MSCI World Index than the entire UK stock market.

“Active fund investors will typically hope to improve their chances of outperformance by selecting fund managers with established and successful track records, which is no guarantee of success, but significantly better than picking funds with a blindfold and a pin. Passive fund investors also need to be on their toes as some funds charge egregiously high fees, which can be easily avoided by switching to a cheaper alternative.

“The decision to invest in active or passive funds is, perhaps surprisingly, not binary.Unlike disciples of passive or active styles, private investors needn’t be dogmatic in their use of either strategy. It’s possible to mix and match active and passive funds within a portfolio, perhaps picking active managers you have a great deal of confidence in and then gap-filling using tracker funds. Ultimately active and passive funds are tools at investors’ disposal, rather than a rigid lifelong doctrine they must cleave to.”

Manager versus Machine H1 2023 key results

Percentage of active funds outperforming a passive alternative

H1 20235 years10 years2022
Asia Pacific Ex Japan51%26%39%12%
Europe Ex UK35%29%46%43%
Global33%22%22%30%
Global Emerging Markets77%56%53%21%
Japan34%33%60%36%
North America43%15%22%40%
UK49%26%50%13%
TOTAL44%27%38%27%

Sources: AJ Bell, Morningstar. Total return in GBP to 30 June 2023, 2022 data to 30 November 2022.

Manager versus Machine H1 2023 key points

  • In the first half of this year 44% of active equity funds outperformed a passive alternative
  • That’s a lot better than 2022, when only 27% of active equity funds beat the typical passive alternative
  • Over the last ten years only 38% of active managers have beaten the passive machines
  • The popular global sector continues to disappoint
  • Only a third of global active funds managed to beat a passive competitor in the first half of 2023
  • The longer term figures are even worse, with only 22% of active funds in this sector outperforming over ten years 
  • Much needed improvement in UK equity funds
  • Half (49%) of UK equity funds beat the passive machines in the first half of this year, a much better showing than the 13% who outperformed in 2022
  • Time to shine for Global Emerging Markets managers
  • Three quarters (77%) of managers in this sector have beaten the passive machines so far in 2023
  • Mind the passive charge gap
  • After ten years, a £10,000 investment in one of the most expensive UK tracker funds is today worth £1,660 less than the same amount invested in the cheapest tracker

Manager versus Machine H1 2023: global fund allocations

Source: AJ Bell, Morningstar.

About Manager versus Machine

Our Manager versus Machine report looks at active funds in seven key equity sectors and compares performance to the average passive fund in each sector, rather than a benchmark index. This provides a real world comparison, reflecting the practical investment choice that retail investors face between active and passive funds. While benchmark indices are also useful comparators for active funds, investors can’t buy an index; tracker funds are the nearest they can get. The report analyses historical fund data, and while past performance can provide an insight into long running trends, it is never an entirely reliable guide to the future. 

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