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Shunning small cap rally cost fund managers in 2017

Seven out of 10 UK fund managers lagged the stock market last year as they were left behind by the rally in smaller companies, research finds.

Shunning small cap rally cost fund managers in 2017

Shunning rallying smaller companies cost UK fund managers in 2017 according to a study from exchange-traded fund (ETF) provider Lyxor, which shows seven out of 10 failed to beat the stock market.

Lyxor ETF’s report  found that globally, more active fund managers beat their benchmarks last year compared with 2016, with 44% outperforming compared to 28%.

However, this upturn has not been witnessed in UK equity funds and, according to head of Lyxor ETF research Marlene Hassine Konqui, ‘UK equity managers have failed to generate alpha since the Brexit vote’, she said, with just three in 10 outperforming last year.

‘Many of the managers were underweight small-cap stocks,’ she said. ‘Those stocks outperformed large-cap stocks in 2017, rebounding after the drop in 2016 due to Brexit.’

European small-cap active managers were among the best performing, with nearly three-quarters outperforming, on average by 1.4%. The best managers in this category, those in the top 25%, outdid their benchmark by 2.9% on average.

But the picture was different for large-cap investors. Three quarters of large-cap China managers underperformed, as did two-thirds of managers focused on US blue-chips.

Bucking the trend was Europe, where over half of large-cap active managers outperformed. In the Italian stock market, this proportion rose to 81%.

In the bond markets, more than two-thirds of active managers beat their benchmarks, a performance reflected in healthy inflows. 

While passive funds across all asset classes enjoyed heavier inflows than actives, at $963 billion (£691 billion) versus $841 billion, the bulk of the active inflows were into bond funds, at $549 billion.

'A switch back to active management was apparent after declines in 2015 and 2016,' said Hassine Konqui.

More than 50% of investment grade corporate bond managers outperformed and 56% of US high yield bond funds beat their benchmarks.

8 comments so far. Why not have your say?


Apr 25, 2018 at 17:53

Not surprising - small caps are under-researched (a situation probably made worse by MiFID II), tend not to get much publicity and often don't create much news flow leading to short term investors (most fund managers fall into that category) to get bored and give up.

But from time to time this neglect and under-valuation leads to rallies.

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Tyrion Lannister

Apr 25, 2018 at 19:38

I have approx 25% of my portfolio in small caps. Yes, they're more volatile but if you're prepared to ride the falls, they give better long term growth. The caveat being, choose good fund managers!

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David Andrews

Apr 25, 2018 at 19:43

"But from time to time this neglect and under-valuation leads to rallies. "

I think if you look , you will find it is the majority of the time.

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colin overton

Apr 26, 2018 at 08:09

Shame that Woodford's WPCT didn't benefit from this rally, at least not for long1

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David Andrews

Apr 26, 2018 at 12:12

@ Colin Overton

Very few - if any - investments in WPCT fall under what is normally understood as a "small company".®ion=gbr&culture=en-US

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colin overton

Apr 27, 2018 at 12:10

Dear David, So they're just rotten pics, whatever the size of the company?

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David Andrews

Apr 27, 2018 at 14:50

I'm pointing out what I regard as the flaws in your logic i.e.start-ups/bio-tech specialists won't react to the same market stimulii as an engineering company/house-builder

FYI I bought WPCT at 89 and sold at 80 a few weeks back, however I continue to hold HSL, AIF, TRG and JESC as I prefer these so-caller smaller company IT's. I note that HSL in particular has been pretty strong over the last two months and may well add to that.

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Tyrion Lannister

Apr 27, 2018 at 15:20

I too hold HSL and have been pleased with. It's already back up to it's price at the end of last year while many other ITs are still playing catch up.

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St James's Place makes raft of fund manager changes

by William Robins on May 25, 2018 at 08:52

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