Most Active Equity Funds Fail To Outperform Benchmarks In 2023
Update
Most actively managed funds and active ETFs have failed to beat their benchmarks in 2023, research by LSEG Lipper has found. Of the 13,938 actively managed funds globally, including conventional and ESG strategies, just 4,741 managed to outperform their respective indices, representing around 34% of such funds.
The overall average relative performance of all equity funds compared to their benchmarks was -2.4%, the firm found. However, LSEG Lipper noted that around two-thirds of the average underperformance "can be attributed to fees and expenses".
ESG-related funds performed worse than conventional strategies over 2023, delivering an underperformance of -1.9%, compared to their conventional peers' average -1.1% loss.
Around 37% of conventional funds outperformed their benchmarks, compared with 28.6% of ESG-related funds.
Yet Detlef Glow, head of EMEA research at LSEG Lipper, noted that the greater underperformance of ESG funds was partly due to the fact that several use conventional benchmarks to "showcase their ability to beat the respective market". Such an approach was adopted following criticism regarding the potential of underperformance for ESG funds caused by their exclusion criteria, he explained. As a result, Glow warned that while comparisons should be made due to similarities in benchmarks, there is a risk of making false assumptions, since some market environments may favour companies, sector or industries that are ineligible for ESG funds. He added: "These results may indicate that the market environment over the course of 2023 was in favour of conventional funds, since companies from some of the so-called old economy sectors showed good returns alongside the ‘Magnificent Seven'. That said, companies from the old economy sectors are often not as advanced with regard to their ESG credentials and, therefore, are often excluded from ESG-related portfolios. Therefore, it can be concluded that the overall success of ESG-related funds compared to their conventional peers is highly dependent on market trends."
LSEG Lipper also analysed fund performance in comparison to their technical indicators. The results were not dissimilar from the benchmark analysis, with just over 31% of actively managed funds beating their technical indicators.
Similar results were also found when dividing funds between conventional and ESG, with 33.8% and 25.3% outperforming their technical indicators, respectively.
Glow said: "In general, it can be said that the gap between the average out- and underperformance has widened as the universe of analysed funds has increased. This increase might be caused by the fact that the technical indicator is not always a suitable benchmark for performance comparisons, as it may not fully represent the eligible investment universe of specific funds."
As a result, Glow said when considering both benchmark and technical indicator analyses "it can be concluded that actively managed funds were, on average, not able to deliver value added to investors over the course of 2023".
Link: https://www.investmentweek.co.uk/news/4161839/most-active-equity-funds-fail-outperform-benchmarks