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Why passive funds outperform active managers amid COVID-19 pandemic

By Cameron Micallef · April 16 2020
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Invest

Why passive funds outperform active managers amid COVID-19 pandemic

By Cameron Micallef
April 16 2020
Reading:
egg
passive funds outperformed active manager

Why passive funds outperform active managers amid COVID-19 pandemic

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By Cameron Micallef · April 16 2020
Reading:
egg
passive funds outperformed active manager

Active managers have underperformed passive funds by its largest margin since 2016 as the mass market sell-off left active investors underweight in China and technology stocks, new research has found.

Copley Fund research has found that US active funds posted their biggest underperformance relative to passive funds since Q1 2016, at 1.44 per cent worse than benchmark indexes.  

Active Global Emerging Markets fund returns fell 1.36 per cent short of indexes, while Asia funds were 1.04 per cent below passive peers, the worst underperformance since Q3 2018.

The problem for most active investors is they underweighted China, even for active fund managers with aggressive growth strategies, the research found.

“The outperformance of China was costly for active managers, who have been increasing underweight bets over the last 18 months,” said Steven Holden, CEO of Copley Fund Research Global.

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Emerging Markets and Asia Ex-Japan funds were all close to record underweight in Chinese equities going into the crisis.

Since the start of 2020, aggressive growth strategies, in which investors buy stocks with higher valuations and growth expectations, have outperformed value portfolios by the most since 2017, Copley’s data showed. 

While all investment categories are deep in the red, aggressive growth strategies outperformed those favouring cheaper stocks by 14.3 per cent in the US funds category, 9.62 per cent for global funds and 4.5 per cent for Emerging Market active funds

“Active strategies focussed on aggressive growth stocks are performing well in the downturn. No one could have anticipated the scale of this market rout, and yet these strategies are adding relative performance despite the overall ugliness of the market,” Mr Holden continued.

The research also showed that active managers underweighted US tech giants, with Microsoft, Apple and Amazon accounting for nearly 15 per cent of the growth for the S&P 500, which contributed to 0.51 per cent of the underperformance for active US and 0.31 per cent for global funds.

Even so, all is not lost for active managers – if the recovery from the global financial crisis is anything to go by. Copley Fund Research analysis showed that, historically, US and GEM active managers recorded their biggest outperformance against indexes in 2009.  

“Price distortions caused by high levels of volatility, forced selling and passive outflows will create opportunities for long-term active managers to buy into favoured stocks at attractive valuations,” Mr Holden concluded.

Why passive funds outperform active managers amid COVID-19 pandemic
passive funds outperformed active manager
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About the author

Cameron is a journalist for Momentum Media's nestegg and Smart Property Investment. He enjoys giving Aussies practical financial tips and tricks to help grow their wealth and achieve financial independence. As a self-confessed finance nerd, Cameron enjoys chatting with industry experts and commentators to leverage their insights to grow your portfolio.

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About the author

Cameron is a journalist for Momentum Media's nestegg and Smart Property Investment. He enjoys giving Aussies practical financial tips and tricks to help grow their wealth and achieve financial independence. As a self-confessed finance nerd, Cameron enjoys chatting with industry experts and commentators to leverage their insights to grow your portfolio.

Join The Nest Egg community

We Translate Complicated Financial Jargon Into Easy-To-Understand Information For Australians

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