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View the article online at http://citywire.co.uk/wealth-manager/article/a743148

Where did passive work best last year?

by Robert St George on Apr 02, 2014 at 13:07

More than half of international small cap managers beat their benchmark in 2013. This means they can now boast of having done so over one, three and five-year periods. No other sector has achieved this, according to the Spiva scorecard.

‘Regardless of the measurement time horizon, international small cap equity remains the only category that has shown persistent outperformance by active managers,’ commented Aye Soe, S&P’s director of index research and design.

Soe nonetheless remained sceptical about active equity managers in general. ‘It is commonly believed active management works best in inefficient markets such as small-cap or emerging markets – an argument we find to be unconvincing,’ she said.

The Spiva report also covers fixed income, and in this sphere active managers had a strong year – in relative, if not absolute, terms.

Again on an asset-weighted basis, the average investment grade long fund lost 0.42% in 2013 while the Barclays Long Government/Credit index plunged by 8.83%. Long-only government bond funds similarly outperformed, slipping 4.61% while their benchmark dropped 12.47%.

Yet if active management did offer some downside protection in those asset classes, it failed to capture all the upside in the better performing high yield market. There, the average active fund returned 6.73% last year compared with a 7.46% rise in the Barclays High Yield index.

‘Most active fixed income managers in the longer-term government, longer-term investment grade and global income categories outperformed the corresponding benchmarks,’ said Soe.

‘At the same time, the one-year data also demonstrates the difficulty in predicting the interest rate path as highlighted by the underperformance of short-term government, high yield and mortgage-backed security bond funds.’

Short duration government bond funds lagged by 367bps last year, although on the corporate side short duration products did eke out a modest 26bps of outperformance.

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