Lipper: Active vs. Passive, Round 3,462

June 7, 2012

Our team at Lipper spent much of the first quarter handing out awards to fund managers round the world who have delivered exceptional performance to their investors. Since then, I’ve had time to take a step back and assess just how good the wider European industry has been at outperforming over the longer term.

Active fund managers’ ability to out-perform their benchmarks sits near the heart of any discussion on the relative merits of active versus passive. In broad terms the argument against investing in an actively-managed fund is that one takes on the additional risk that the fund will significantly under-perform the index, a risk that is exacerbated over time by the additional costs associated with such a fund.

The argument against passive is that one not only misses out on the possibility of superior, but also that, in principle, one is guaranteed to under-perform the index.

Clearly the case for active fund management goes hand-in-hand with the case for prudent fund selection. Indeed an industry has grown up trying to deliver the latter for investors, with professional fund selectors choosing funds to invest in and packaging this up as a product of itself: funds of funds. Assets invested in funds of funds in Europe stand at around 360 billion euros – noticeably greater than the assets invested in passively managed funds.

The most straightforward means to assess actively managed funds’ success in beating their benchmarks is to look at their latest performance figures. To this end all actively managed equity funds’ performance relative to their benchmarks was assessed over 1, 3 and 10 years to the end of December 2011.

The proportion of funds that out-performed varied from 26.7 percent in 2011, 40.0 percent over 3 years and 34.9 percent over the past 10 years. Solely for managers of UK equity funds, the figures were 22.4 percent, 42.4 percent and 37.6 percent.     But the issue of survivorship bias also needs be grasped. To do this, funds’ rolling returns were assessed every year from 1992 to the end of 2011. For 1-year periods, the proportion of equity funds that out-performed has varied between 59.1 percent and 26.7 percent, coincidentally the first and last years in this analysis.



The annual average proportion of out-performing funds is 42.8 percent, at the higher end of the spectrum found in the initial analysis above. This suggests that the difficult recent market conditions have indeed had a negative impact on the proportion of active managers that have been able to beat their benchmarks.

The wide variation in out-performance depending on classification of funds is highlighted in 1-year rolling returns. For example, funds investing in Asia Pacific (ex-Japan) ranged from 8.3 percent (in 2004) to 83.8 percent (in 1999) of funds out-performing their benchmarks, while for UK equities the range has been much narrower, between 23.1 percent (2011) and 64.5 percent (2000).

For long-term investors the fact that an active manager does not out-perform in every calendar year is likely to be less significant than whether he/she can out-perform over a longer time period. To examine this, the data was expanded to look at rolling 3-year and 10-year periods.

For 3-year rolling periods the proportion outperforming is 41.4 percent and for 10-year rolling periods it is 39.7 percent. In other words, the proportion of funds out-performing over longer periods may have dropped very slightly, but it remains largely stable.

Over 3-year periods, a greater proportion of UK equity managers generally outperform than for other classifications. While the average proportion of Asia Pacific funds out-performing is slightly higher than that for the UK (48.9 percent compared to 47.6 percent), this is clearly the result of results posted over the first 10 years, while the more recent period has seen a significant fall for Asian fund managers.



For 10-year rolling periods among the largest classifications, UK equity managers impressively maintain their average proportion of out-performers (47.4 percent), while North American equities – already relatively poor cousins – worsen dramatically over this longer period, with an average of just 20.8 percent of funds out-performing their benchmarks.

These findings will clearly not settle the active versus passive debate one way or the other, but they do provide robust statistical research into funds’ relative performance. Such insights can better inform this ongoing discussion.


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Could you please elaborate on your methodology? Especially on the issues of ‘survivor(ship) bias’, ‘back-filling bias’ and ‘(mis)classification / factor bias’ concerning the Lipper database.

To my knowledge Lipper has a ‘dead’ fund database. Why not use it to prevent ‘survivor(ship) bias’?

You’re trying to grasp ‘survivorship bias’ by taking funds’ rolling returns (for every year from 1992 to the end of 2011) and looking at the percentage out-performers over 1-year periods. The numbers you mention for the first year (59.1%) and for the last year (26.7%) are completely in line with a database that suffers from ‘survivorship bias’. A part of the underperformers from 1992 will have disappeared from the database (especially the consistent underperformers), so with the ‘survivorship biased’ database it looks as if a larger percentage will have outperformed than in reality has been the case.

Very curious to hear your thoughts on these issues.

Posted by GerardVanDam | Report as abusive

The analysis I carried out did indeed include funds that have since closed.

I used rolling 1 year returns so as to get an insight into returns for funds that did not have 3 and/or 10 year returns, and to see how the findings vary over different periods, i.e. together accounting for as many funds over as many different periods as possible.

For any given 1 year period, my approach ensures the data is robust. As for comparing 1992 with 2011 one year returns, then certainly I could have run the analysis looking only at the 10% of actively managed equity funds in Europe have a track record that stretches back to 1992 (and I may do this in future). However, I wanted to get as much of an ‘industry-wide’ view as possible.

Please email Joel your email address and I’d be happy to send you the report that fleshes out the analysis a little more.

Posted by ed.moisson | Report as abusive

Thank you for the offer to send me your report. I’ll definitely contact Joel.

Some information for other readers. This is probably no news to you:

Carhart (1997) has split ‘survivorship bias’ into ‘survivor bias’ and ‘look-ahead bias’.

‘Survivor bias’ = Dead portfolios are excluded from the sample.

‘Look-ahead bias’ = methodology requires funds to exist for a specified period of time (in this blog: 1, 3 or 10 years).

In using rolling 1 year returns (to grasp ‘survivorship bias’) the effect of ‘look-ahead bias’ was reduced. ‘Survivor bias’ was already covered in using the closed/dead fund database.

Posted by GerardVanDam | Report as abusive