Do the best performing active funds have a shelf life?
Author: Ash Weston, 8AM Global
The active vs passive debate continues. As more and more investors move into passive funds.
S&P Dow Jones indices analysts created a fascinating review of active fund management compared to the market between June 2017 and June 2022. After selecting the top 25% performing active funds, they went on to map their performance against random distribution (a 50/50 chance of outperforming the index).
The following table is a summary of their findings:-
| 12 Month Period to | Random Distribution | Continued Outperformance |
| June 2019 | 50% | 56.9% |
| June 2020 | 25% | 51.9% |
| June 2021 | 12.5% | 15.6% |
| June 2022 | 6.25% | 1% |
Source: Finax
Between years three and four, there was a significant drop-off in performance, and by year five the number still outperforming drops below the random distribution.
This suggests that active funds have a period of three to four years with the greatest likelihood of outperformance, and then the returns fall markedly. Ironically, on average across the whole sector, active fund managers tend to be replaced/leave every four and a half years. Which we’re sure is a coincidence!
In order to consistently outperform the market, the best active fund management mind needs to be one step ahead of;
- The economy
- Business
- Consumers
- Policymakers
- Sociopathic dictators…
Generally, they will have chosen a strategy that works in most conditions, and have the emotional control to act without bias, and the systems and processes to enact their changes expediently.
Some active funds do indeed tick the above boxes, at least for a period. Counterintuitively, many active managers that fall out of the random distribution model above for a short period of underperformance can rapidly and suddenly become relevant as the market conditions change. At 8AM we screen fund managers for quality and consistency without prejudice and can revisit an active fund many times over a market cycle whilst targeting a consistent return for your clients. This kind of adaptive, data-driven decision making simply cannot occur in investment processes that require human ego’s to be sated before making a decision to exit, enter or re-enter a previous position. The AQ tool doesn’t care about looking foolish or changing direction when the data suggests we should do so.
If you are seeking an optimised, data-driven blend of active and passive investments, speak to us to find out more.
This content is intended for financial professionals only. These are the author’s views at the time of writing and may be subject to change. This content is not intended to provide the basis for any investment advice or recommendation. Any forecasts, figures, opinions, tools, strategies, data, or investment techniques are included for information purposes only.
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