Finance

Mark Gilbert is a Bloomberg Gadfly columnist covering asset management. He previously was a Bloomberg View columnist, and prior to that the London bureau chief for Bloomberg News. He is the author of “Complicit: How Greed and Collusion Made the Credit Crisis Unstoppable.”

It is a truth (almost) universally acknowledged these days that an investor in want of a good fortune needs to be in possession of an index-tracking fund rather than an active manager. UBS AG, though, disagrees -- at least in Europe.

The Swiss bank's analysts, led by Michael Werner, who covers the fund management industry from London, crunched the numbers for more than 27,000 European mutual funds. In a research note published Monday, they conclude that actively managed funds have handily outpaced not only their benchmarks, but also their passive competitors in European equities.

Active Outperformance
Average after-fees performance for more than 27,000 European funds from 2000-2016
Source: UBS analysis of Morningstar data

There's a reason why the figures look better when they exclude U.S. and global portfolios. One of the conclusions reached in the report is that beating the indexes is easier for investors focused on Europe than for those investing in the U.S. or for portfolio managers with a worldwide focus.

The global universe of stocks is too large for investors to wrap their arms around successfully, UBS argues. The U.S., meantime, suffers a similar scale problem but is also scrutinized by more stockpickers.

Six of the nine worst performing categories over the 2009-16 period were U.S.- or global-focused categories. The U.S. equity market is the most liquid, deepest and best covered market in the world. Its floated market cap of more than $29 trillion also makes it the largest equity market in the world. For U.S. focused funds, we argue it is difficult for portfolio managers to generate a consistent informational advantage given the high level of focus and coverage on the U.S. markets.

That helps explain how in the past seven years returns from European active managers have outpaced those generated by their U.S. counterparts. This chart, and the next one, both show performance after fees:

The study acknowledges that 2016 was "the single worst performance year for European active managers since at least 2000." In the year to July, however, portfolio managers have beaten their benchmarks by 59 basis points, UBS says. Moreover, passive funds have delivered even skimpier returns than active funds during the period studied -- a better comparison than against benchmarks, the bank argues.

The UBS report flies in the face of the current accepted wisdom that investors have been fleeced for years by the stockpicking crowd. S&P Global Inc., for example, produces a widely followed tally called the S&P Indices Versus Active Funds Scorecard.

The European version of its report for 2016 argued that for one, three-, five- and 10-year periods, "euro-denominated active funds invested in pan-European equities underperformed across all time horizons analysed," with only a handful of single-market exceptions.

UBS argues there are two flaws in the S&P analysis. Firstly, it benchmarks every fund against the relevant S&P index, which produces tracking errors for those strategies that follow different benchmarks. Secondly, it misclassifies funds that merge or are simply closed as being underperformers, whether or not they actually missed their targets.

The usual caveat about lies, damned lies and statistics may well apply here. Making the data dance in different ways to suit whichever side of the argument you favor seems to be an intrinsic feature of the active/passive debate. But if UBS is correct, then the headlong rush into ETFs that's characterized U.S. investment behavior in recent years may not be as appropriate in Europe.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Mark Gilbert in London at magilbert@bloomberg.net

To contact the editor responsible for this story:
Jennifer Ryan at jryan13@bloomberg.net