Reports of the death of active management may have been premature with a new study confirming the out-of-fashion investment style can still add alpha after (cheaper) fees.
As reported in the Financial Times (FT) last week, the ‘Fund Selection: Sense and Sensibility’ study of certain Europe-based investment products over a 12-year period to the end of 2020 found active strategies outperformed passive on average by an annualised 0.56 per cent before fees.
“Looking at 35 separate equity fund categories — such as global emerging markets and UK large caps — the researchers found that active funds outperformed in 28 categories, or 80 per cent, although this outperformance was only deemed to be statistically significant for six of them,” the FT report says.
And for institutional investors at least, active management still delivered after-fees alpha in 71 per cent of the Luxembourg- and Ireland-based UCIT fund categories analysed in the study.
However, the active after-fees outperformance rate accrued to just 46 per cent of the fund categories for retail clients.
The research found stronger evidence for active alpha in equity rather than fixed income funds across both institutional and retail product types.
“Active equity managers can outperform the passive alternative when fees are reasonable,” the study says.
“… Retail investors experienced negative net outperformance due to the level of fees across fixed-income categories.”
Institutional investors still saw after-fees active outperformance in three of the seven fixed income categories examined in study conducted by European academics Guido Baltussen, Stan Beckers, Jan Jaap Hazenberg and Willem Van Der Scheer.
The researchers also analysed returns on a money-weighted basis, finding average retail active equity funds added value to the tune of €220,000 before fees each year.
“Unfortunately, the retail investor — given the fees — could not benefit much from this active management skill since the average €410,000 in fees charged largely exceed the gross value added,” the report says.
Hazenberg told the FT-owned publication that retail fees should “eventually converge to the institutional level” as more jurisdictions ban fund commissions – or ‘retrocessions’ as per European terminology.