Lyxor Asset Management has published the findings of its annual study comparing the performance of active funds domiciled in Europe with that of their benchmarks. The Lyxor ETF research team analysis, now in its fourth year, is unique in its scope. It analyses the performance of 3,871 active funds established in Europe, representing EUR 1,300 billion in assets under management, compared with their benchmarks over a 10-year period.
The latest study finds that 28% of active funds in Europe outperformed their traditional benchmarks in 2016, representing a net decline compared to 2015 results when 47% of the active managers studied beat their benchmarks. Active managers who succeeded in outperforming their benchmark were those that were overweight on the "value" (low valuation) risk factor in their allocations at the expense of low-beta, quality and momentum factors which has supported 2015's performance.
The underperformance of active managers relative to their traditional benchmarks in 2016 compared with the previous year can be attributed to market conditions being devoid of meaningful trends and instead dominated by frequent stylistic rotation from one factor to another, with an overall lack of salient factors.
The Lyxor study underlines the importance of investors having an analytical tool to conduct a detailed analysis – regardless of market conditions – of risk factors, whose fundamental role in generating performance has been confirmed.
"In the current market environment, which is influenced more by politics than by the economy, it has been difficult for active managers to generate performance and take advantage of changes in trends in 2016", commented Marlene Hassine, head of ETF research at Lyxor. "These political uncertainties, still to the fore in 2017, particularly in Europe, are certainly going to make the task of investment managers harder in 2017".
A further aspect of the study focused on comparing the performance of active investment funds in Europe with Smart Beta indices created using criteria that are not based on market capitalisation. This analysis found that only 13% of active funds beat the Smart Beta index, reinforcing the position of Smart Beta as a vital mainstay for investors.
In order to help investors optimise portfolio construction, Lyxor Research has developed a quantitative model for monitoring market trends to enable dynamic factor-based allocation. The Lyxor fund selection process incorporates this model when analysing the funds' factor-related weighting, thereby enabling an optimised portfolio approach.
Nicolas Moussavi, head of mutual fund research, commented: "This tool helps to quickly highlight a fund's positioning and to classify it based on its style biases. It provides a relevant initial breakdown of the style and philosophy of a fund's management, thus enabling us to go into greater depth with the manager regarding certain aspects found in this initial phase of analysis. This factor-based approach proves highly complementary to a more traditional qualitative approach.
The tool allows us to constantly improve the quality of our analysis and the extent of our understanding of the funds. The Lyxor fund selection team, which brings together 25 analysts, is one of the largest in Europe and so plays a key role in the "architect-asset manager" model developed by Lyxor. It selects those funds that are best aligned with its clients’ needs, and advises our partner fund managers on their factor-based allocation".