The number of actively managed funds that outperform stock indices is fairly meagre, especially over the long term. Recent studies confirm this. Here's why fund managers so rarely manage to beat a comparable index — and what that means for your investment strategy.
In mid-April, S&P Global once again published the SPIVA, a major comparison of the performance of indices with the returns of actively managed funds. The core message, once more: on the equity markets, most active funds fail to beat a comparable index. The results are no great surprise, even if they turned out to be especially clear-cut for the past year.
87 percent of the actively managed funds examined with a focus on Germany performed worse than the S&P Germany BMI in 2023. Among funds investing globally, 84 percent failed to beat a comparable index, and in the "European equities" category, 83 percent. One challenge for many active fund managers was that the positive performance in the markets was concentrated primarily on large blue-chip stocks and certain sectors such as tech shares.
That said, the past year's results are no exception, as the long-term comparison shows. Over a ten-year period, 85 percent of active funds focused on German equities were unable to outperform a corresponding index; for European equities the figure was 92 percent, and for those investing globally as much as 98 percent.
Even though different studies take different approaches and then arrive at somewhat different results, active funds are inferior to passive products such as ETFs in most cases. This is shown, for example, by a study from Morningstar in March of this year. There, active funds in the "US Large-Cap Blend Equity" category — that is, large blue-chip stocks — did achieve an outperformance rate of 41.9 percent for 2023. But looking at a ten-year investment horizon, this figure shrinks to a meagre 6.3 percent. Among European large caps, according to the study, only 23.9 percent managed to outperform their passive competitors in the past year. And over the ten-year period, 11.1 percent.
High costs and a risky strategy
And yet active funds are still very expensive compared with ETFs. According to a 2023 study by the European securities regulator ESMA, the average costs of actively managed equity funds in Europe between 2018 and 2022 stood at 1.7 percent per year, while those of ETFs were only 0.4 percent. But it's not just high costs that weigh on investment results. The fact that active funds so consistently perform poorly has to do above all with their investment strategy. Active funds try to outperform the market as a whole through a targeted selection of securities. This is meant to justify the higher costs. The problem: even fund managers, for all their expertise, cannot foresee the future.
In trying to find tomorrow's performance drivers, or to catch a particularly favourable moment to get in and out, you can get lucky once. But you can't repeat it systematically, again and again. It's precisely the long-term results of the performance comparisons that show this. Among the findings of capital market research is that the best possible diversification increases the likelihood of investment success. ETFs are an efficient instrument here for capturing the various segments of the global equity market.
A special combination of ETFs
That is exactly what quirion's global ETF portfolio aims for. It currently contains seven equity ETFs, selected and combined so that they track the performance of the global equity market as closely as possible. In selecting the ETFs, quirion pays attention to numerous aspects, in particular the accuracy of the tracking, but also the security of the issuers. The portfolio invests in around 8,000 shares from more than 70 countries.
Depending on your individual risk appetite and personal investment horizon, quirion adds bonds to the mix in ten-percent increments. And for this, in turn, it draws on ETFs, currently combining six different products. The primary goal of adding bonds is to dampen the fluctuations of the respective equity portion in the portfolio. This means that even those for whom a pure equity portfolio would not be suitable can benefit from the return opportunities of the equity markets. Depending on your personal risk appetite, the strategy variants offer the best possible balance of return opportunities and risks. And they are thus a solid basis for tapping into the long-term return prospects of the capital markets, without taking on unnecessary risks.
