Majority of equity funds fail to outperform their benchmarks

A majority of equity funds fail to outperform their benchmarks, according to new data from Lipper.

Lipper says that on average 40% of equity funds outperform their benchmarks. “This figure not only represents the proportion of equity funds that have outperformed in the most recent three years, but also approximates the average proportion of equity funds that have out-performed for 1-, 3- and 10-year rolling periods over the past 20 years. 

Among the findings, Lipper notes that funds investing in North American equities have consistently fewer managers that have out-performed their benchmarks than for other classifications. Another pattern that is consistent across the three time periods is that more funds investing in UK and European stocks have beaten their benchmarks than those funds investing globally.

The findings add fuel to the debate about active versus passive investing. The success of the argument for active fund management can be seen in the size of the industry, Lipper says. “Actively managed equity funds in Europe stand at just under €1.5trn, while index trackers have €160bn and ETFs €139bn. In other words, of the equity funds pot, passively managed products make up less than 17%.”

Lipper stresses that the proportion varies each year, broadly between 30% and 60% of funds. It also varies for funds investing in different regions, which can be between 20% and over 50% over different periods.

Looking at actively-managed equity funds’ performance relative to their benchmarks over 1, 3 and 10 years to the end of December 2011, the proportion of funds that out-performed varied from 26.7% in 2011, 40.0% over 3 years and 34.9% over the past 10 years

Actively-managed bond funds fared better over 3 years (45.4% out-performed), but the proportion tailed off dramatically over the 10-year period, falling to 16.2%. The latest year was similar to that for equities, with 23.7% of bond funds out-performing their benchmarks.

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