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Vincent Denoiseux, Lyxor

Lyxor ETF research reports bumper years for active equity ETFs across Europe


Lyxor ETF Research finds that 2020 was a bumper year for active equity funds across Europe, while ESG active funds posted strong results across the board.

The findings of their latest research reveal that 66 per cent of Europe Equity Large Cap beat their benchmarks; 80 per cent of Europe Equity Small Cap outperformed and, on average, ESG funds outperformed their peers across all segments.

The firm also found that fixed income managers recorded a mixed performance, with Emerging Markets funds coming out on top, but consistent alpha generation over the long term remains more elusive, with only 12 per cent of World Equity managers outperforming both in 2019 and 2020.

In a year like no other for financial markets, due to the pandemic which sent volatility levels soaring, geopolitical risks and massive sector rotation, many active managers have often been able to protect portfolios, with active equity fund managers taking advantage of elevated asset dispersion to generate alpha, the firm writes in the latest edition of its Active-Passive Navigator. 

The report found that a majority of active managers outperformed their benchmarks across most equity categories. Uneven government responses to the pandemic led to higher price dispersion across countries, sectors and factors, which in turn created opportunities for active equity managers, with 66 per cent of European Large Cap managers beating their benchmark. 

“In particular, 2020 was a strong year for Small Cap managers across the board, who strongly profited from higher dispersion and increased volatility levels: 80 per cent of Small Cap active managers outperformed in Europe, while 85 per cent outperformed in the UK, adequately positioning for some kind of last-minute Brexit deal.”

2020 saw a more mixed performance from active Fixed Income managers, many of which struggled to keep up with the impressive bond rally engineered by central banks or with the relentless credit-spread compression, the firm says. 

“There were several bright spots though. Emerging Markets Debt managers stood out with 69 per cent doing better than their benchmark. They steadily increased risk after Q1 and moved to lower quality while arbitraging diverging trends in emerging markets inflation and stimulus. US Aggregate and Global Aggregate Fixed Income managers also did well (respectively 54 per cent and 52 per cent). 

“They took advantage of the changing yield curves and higher US inflation, also finding alpha in securitised, quasi-sovereign and local issues. By contrast, investors were better off with passive products in high yield bond markets, with only 29 per cent of HY fund managers in the US outperforming their benchmarks, hamstrung by the aggressive spread tightening that quelled dispersion, while they remained overly cautious.”

Lyxor ETFs writes that in a context where ESG ETFs represented more than half of the total inflows in the European ETF market in 2020, it is interesting to note that across all asset classes covered in the report, ESG funds outperformed their peers last year, with an average 1.4 per cent excess return against their respective peers’ average. 

“Overall, 2020 will be remembered as an outstanding year for active fund managers. Lyxor ETF Research found that their relative returns in 2020 outstripped those of 2019 across 85 per cent of all asset classes.”

Consistent alpha generation over the long term remains more elusive, the Lyxor study found, with only 12 per cent of active World Equity managers outperforming both in 2019 and 2020, while only 9 per cent of World Equity Large Cap funds outperformed over a 10-year period, showing that the impressive rally enjoyed by global stock markets over the last decade has been tough to harness for most active equity managers. 

Vincent Denoiseux (pictured), Head of ETF Research and Solutions at Lyxor Asset Management, says: “In an unprecedented global context which was extraordinarily challenging for active managers, it is fair to say that many active equity managers in 2020 on the whole fulfilled their long-standing claim of protecting portfolios in the face of strong market turmoil. But with long-term alpha generation still challenging, investors embracing active management need to be agile and reactive in managing their portfolios by anticipating and choosing active managers able to quickly seize the evolution of markets. For less tactical investors looking at long-term portfolio allocation, ETFs represent a strong value proposition.” 

Jean-Baptiste Berthon, Senior Cross-Asset Strategist at Lyxor Asset Management, says: “While macro fundamentals will normalise over 2021, trading conditions will remain atypical. Sequencing regional and sector recoveries, navigating rich and crowded assets, with few reliable portfolio hedges and lingering uncertainties will not make active managers’ job any easier. Asset dispersion and more diversified investment themes would support alpha from bottom-up selection, but alpha from market-timing will be trickier and pivotal. Combinations of active and passive investments will require greater selectivity, depending on the strength of assets’ drivers and their risks of reversal.”

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