By now it’s widely known that most active managers underperform almost every year, and over the long run the vast majority of them do so. But even by that grim yardstick, UK stockpickers had an absolute shocker in 2022.
FT Alphaville wrote about S&P Dow Jones’s annual “SPIVA” scorecard for US fund managers last month, and today the index provider released its European version.
The results were… not great:
It was a challenging year for active managers in European equities, with the Pan-European Equity category recording its highest annual underperformance rate since the SPIVA Europe Scorecard’s inception in 2014. Fixed income managers had a better year in relative terms, with the majority outperforming in 5 of 11 categories over the one-year horizon. Across both asset classes, however, underperformance rates increased to a similarly high average over a 10-year horizon.
However, the real shocker was the performance of active UK equity funds. A massive 92 per cent of large-cap funds and 97 per cent of mid-cap funds underperformed their benchmarks in 2022. That is the worst annual results on record, S&P noted.
Things were a bit better for UK small-caps fund managers, but only relative to the ’mare that their bigger cousins suffered: About 67 per cent of UK funds specialising in smaller stocks underperformed in 2022.
S&P noted that the dispersion between top and bottom performers was unusually large in Europe and in the UK in particular, given all the volatility. “Certainly, there was a high potential for outperformance in European markets last year. Unfortunately, in many categories, there was also considerable potential for material underperformance,” it deadpans.
The index provider suggests that the unusually bad performance of European fund managers versus US ones in 2022 might boil down to currency shenanigans.
In addition to generating greater volatility, rate hikes in the U.S. strengthened the U.S. dollar, which would have been relatively detrimental to European managers investing in the U.S. who chose to hedge their exposure to the U.S. dollar . . . The S&P 500 EUR and S&P 500 GBP outperformed their currency hedged counterparts by 7.8% and 12.2%, respectively, and with lower volatility.
This may help explain why euro- and pound sterling-denominated U.S. Equity managers displayed a considerably higher underperformance rate than their counterparts across the Atlantic: 67% of European-based U.S. large-cap funds underperformed the S&P 500 (in either reported currency), while our U.S. Scorecard reported that only 51% of U.S.-based large-cap funds did similarly.
However, does this fully explain why UK managers performed spectacularly worse than European ones? Further suggestions in the box below.
