The FT’s fund management supplement recently reported that “90% of UK active funds beat the market”. This headline might surprise you because historically it is known that active fund managers often trail their benchmarks and comparable index tracking funds, simply because of their higher management costs. But the headline was based on data from S&P which showed that even taking into account fees, most UK active equity fund managers beat the UK stock market last year.
However you would be wrong to jump to the conclusion that the managers did so much better by wearing out shoe leather visiting numerous companies and doing in-depth financial research. They simply avoided the big mega-caps. With more than a quarter of the FTSE-100 accounted for by 5 large stocks, and companies like Shell, BP and HSBC having a tough year, simply by avoiding larger companies you could outperform the indices. Of course this is a problem when the indices are size weighted and a preponderance of large companies have an overbearing influence on them. This is why some people argue for using “equal size weighted” or other index forms to construct portfolios.
But just avoiding the mega-caps is not sufficient to achieve performance. Monks Investment Trust (managed by Baillie-Gifford) held their AGM this week and shareholders are not happy with the performance of the trust. They have under-performed their benchmark over one, three and 5 years even though they are an active manager using a bottom-up stock picking approach and seem to be focussed on a portfolio of over 60 small to medium cap international growth stocks or special situations.
There is a full report on the AGM and the background to the company here. It will not make happy reading for shareholders in this company, and is another example of the directors of some investment trusts staying too longer (4 out of 5 more than 9 years in this case) which ShareSoc has been commenting on elsewhere of late.