Researchers at S&P Dow Jones yesterday previewed their SPIVA scorecard for European fund managers. You can see more information on this essential measure HERE –

SPIVA is arguably the most consistent measurement system for active vs passive funds on the block and has a fairly long history to boot. So, it’s worth listening to even if it does sometimes feel a little bit like a propaganda tool in the war for passive investing. Its long term message is usually the same – that most active fund managers fail to beat the benchmark index.

But that obscures a number of other arguments which circle around beneath the surface, not least that some managers (a minority) do manage to beat the benchmark, many of them fairly consistently. This counter argument is true BUT most investors (and multi managers) face a devils own task of finding said managers and then making sure they outperform in the subsequent quarters. My sense is that if you are looking for these managers you are best to either scout around the investment trust sector or look at slightly more opaque asset classes such as small to mid cap equities and emerging market equities.

Another cross cutting argument is that active managers can help risk manage, especially in volatile, bearish markets. The argument here is that in sell offs an active fund manager can pick higher quality business franchises and avoid the junk that gets sold off aggressively. I’ve always been slightly suspicious of this argument because it takes as an assumption that sell offs hit certain types of stocks harder. In dramatic volatility outbursts my experience is that pretty much everything (including gold and gilts) gets sold off uniformly as everyone heads for the exits.

Anyway the latest SPIVA figures for Europe shine a light on this argument and surprise, surprise, the active fund industry is found wanting. In the S&P report I’d slightly ignore the headline finding which is that (yet again) the “majority of Europe Equity active fund managers were unable to beat the S&P Europe 350® in Q1 2020.” That’s almost become par for the course. The more interesting finding s start with the discovery that in the first quarter of 2020 fund returns were down 22.7%, while benchmark returns were down 22.4%. But then look at the chart below and check out the March numbers, when pandemonium was at its peak. Notice the big lag between active managers and the benchmark.

Here’s the researcher’s verdict – “March 2020: European funds lost 15.5% for the month compared with a 14.1% drop in the benchmark. The month will go down in European stock market history as one of the most volatile months ever (surpassed only by October 2008). The majority of Europe Equity fund managers were unable to beat the benchmark in either March or Q1 2020 as a whole, with 66% and 57% underperforming the benchmark, respectively. The large proportion of underperforming active funds in March 2020 would suggest that despite their ability to time the market and extract value, fund managers broadly failed to utilize their skills and navigate the market in one of the most turbulent months. This is contrary to the widely held belief that market volatility provides a better opportunity for active managers to outperform.[my emphasis in italics]”

What’s going on here? One part of me wonders whether there is an inherent value drift in many active managers in Europe. Look at the marketing literature for active managers and they tend to fall into one of two camps. The first is what one can loosely call the growth school – “invest in our fund because we pick tomorrows growth winners”. But there is an equally large school, possibly bigger in Europe, which says the opposite – “invest in our fund because we pick the cheap stocks that will continue to do well”.  A variation of this same argument is to overlay the dividend payers on to the strategy. Thus, we have a continuum between real value, through equity income to growth at a reasonable price (with some income). The challenge here is that until the rebound came along, value was a very challenged strategy in these markets and hadn’t really delivered very much of its initial promise. Cheap stuff got cheaper and those paying dividends stopped paying. By contrast growth managers with their tech and US focus escaped scott free!