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  • Home>Research & Insights>Fund Times>The Odds for Active Management -- European Funds Version

    The Odds for Active Management -- European Funds Version

    The U.S. experience is the rule, not the exception.

    John Rekenthaler, 10/04/2017

    Europe's Tale
    Morningstar's Ali Masarwah and Julien Roueche did some research on the performance of actively managed European funds. How likely were they to outgain their costless benchmarks? What was the effective of survivorship? Finally, how important were their costs? One man's work being another man's column material, let's see what Ali came up with. (And thank you, sir.)

    The simplest way to judge the success of a group of actively managed funds is to see how many beat the competing index funds—a calculation that Morningstar calls the Success Rate. The Success Rate ignores volatility, but as most actively run funds are roughly as risky as their relevant index funds, the shortcut doesn’t much affect the result. And it makes for easy interpretation. If the score is above 50%, that group of funds justified their existence. If not, they did not.

    Such an approach, it is true, plays fast and loose. It may be that 49% of a group’s funds thrashed their benchmarks, while the 51% that trailed barely did so.

    However, for the purposes of this column, Ali and Julien's numbers suffice. We seek not the precise appearance of European-based active funds, but rather the general outline. The relevant question: At first glance, to a reasonable level of accuracy, do the results for the European funds seem to match what we have seen in the United States?

    Success Rates
    The answer is yes, they do.

    Across the sprawling European market, covering thousands of funds, the picture was consistent. Most actively managed funds lagged (or expired) the index funds over the trailing three years, more yet for five years, and more yet for the 10- and 15-year periods. This occurred with stock funds and with bond funds. It affected highly diversified funds, and it affected country funds.

    I tried my best with the color scheme. Categories were shaded green for landing anywhere in the top half; all those that managed the feat did so only modestly, and were not near the top quartile. Meanwhile, categories were coded as red only if they finished in the bottom quartile. What could be more generous than that? Even so, there is distressingly more red than green on that table.

    is vice president of research for Morningstar.