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Informed combination of active and passive management is crucial to long-term performance, says Lyxor study


Forty four per cent of active funds in Europe outperformed their benchmarks in 2017, up 16 percentage points on the previous year, according to a new study by Lyxor Asset Management’s ETF Research Team.

Academic research has consistently demonstrated that asset allocation is one of the most important drivers of long-term portfolio return. Lyxor’s research for its fifth annual study comparing active funds with their benchmarks though goes one step further in showing that on top of asset allocation, correctly allocating between active and passive management is another key driver to help investors build better portfolios.
This year’s study has been significantly expanded compared to previous editions, and now assesses more than 6,000 European domiciled active funds versus their benchmark across 23 different universes holding a total of EUR1.4 trillion of assets under management.
Equity managers recorded the strongest results, up by 20 per cent to 47 per cent. Active equity managers who outperformed were overweight on quality and/or growth factors, at the expense of the value factor that underpinned 2016 performance, reflecting greater visibility and liquidity in markets. Despite improving their performance in 2017, only 39 per cent of fixed income active managers outperformed their benchmarks, up from 32 per cent the year before.
While more active funds outperformed their benchmarks, benefiting in particular from lower volatility and a decline in correlations in 2017, the dispersion of results was ultimately poor. Alpha generation was limited to only a few universes, emphasising the importance of informed fund selection to identify the right active managers.
In equities, the best results were found in less efficient or more specific markets such as the Italian and German ones, together with Europe Small Cap. The worst were found in the US, UK and China large-cap universes. In fixed income, active managers focusing on large and diversified bond markets such as Global bonds, US investment grade and high-yield corporate bonds, came out on top. The worst performers were found in narrower bond market segments such as the Euro high yield and Euro inflation-linked universes.
Lyxor says that 2018 is shaping up as a more challenging year for active managers however. The first few months of the year have already been chaotic and the company expects the rest of the year to also be difficult, notably due to the impact of geopolitical uncertainty, the unwinding of quantitative easing policies and increased volatility. In this context, Lyxor says that getting asset allocation decisions and the choice between active or passive vehicles right could be more important than ever.
Marlene Hassine, Head of ETF Research, says: “The challenge for investors is recognizing the specific advantages of each investment tool in order to find the right balance between passive and active management in their portfolios. Based on the 1-year average of outperforming active funds in our universes over the last decade of 34 per cent, our study suggests that within a global portfolio, most of the added value of active management can be captured by allocating 30 per cent to 40 per cent to active funds, while the remaining 60 per cent to 70 per cent can be invested in passive or smart beta funds.”
Philippe Mitaine, Senior Fund Analyst adds: “The study has introduced the monitoring of the dispersion of the relative performance of active managers around benchmarks in 2017. The lower dispersion last year illustrates the higher difficulty to pick managers outperforming strongly their benchmark and the crucial role of informed fund selection to meet long-term portfolio return objectives.” 

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