In a new study of 3740 European domiciled active equity funds representing €1.2trn (£1.02trn, $1.34trn) in AUM, Lyxor found that they had a relatively positive year in 2015 with an average of 47% outperforming their benchmarks last year. In 2014, only 25% outperformed their benchmarks, on average.
Lyxor said a large part of the outperformance can be attributed to higher weightings towards five key factors: low size, value, quality, low beta and momentum which together account for 90% of portfolio returns, according to the study. European active fund managers were overweight low beta, momentum and quality factors in 2015, which all outperformed benchmarks.
When comparing active fund performance with minimum variance smart beta indices, which are designed to reduce portfolio volatility, the results look much less positive, and it turns out most of the outperformance is indeed due to factor exposure rather than to stock-picking skills. While 72% of active funds in the Europe category outperformed their traditional benchmark in 2015, only 14% outperformed a minimum variance smart beta index.
This figure falls to just 8% when looking at a 10-year period. This leads smart beta provider Lyxor to the not very surprising conclusion that investors should indeed buy more smart beta ETFs, which are “an indispensable pillar of investor portfolios”.
“In today’s markets characterized by very low interest rates, higher volatility and no market trend in risky asset markets, investors need to look at new forms of portfolio allocation in order to find diversification and generate performance,” said Marlene Hassine, head of ETF research at Lyxor AM. “Smart beta, which can be implemented, either with a more passive or a more active bias, is one of the new tools at the disposal of investors”, she added.