London – Fitch Ratings says in a new report that 2014 is on track to be one of the worst years for active European equity fund management.
Eighty per cent of European equity funds underperformed their benchmark to end -November 2014 versus 58% for 2013. On average, funds are 2.7% behind their benchmarks, net of fees, as at end-November 2014, compared with 0.6% in 2013.
Defensive sectors and “mega-cap” stocks, which are large constituents of indices, strongly outperformed in 2014, notably in the second quarter. This, coupled with a strong sector rotation throughout the year, has penalised stock pickers, particularly those showing a quality / growth or mid-cap stock bias.
Active European equity funds are threatened by ETFs (exchange traded funds), given their fees relative to ETFs and the underperformance in 2014. In Fitch’s opinion, inflows to European equity funds, particularly those coming from US investors, may favour ETFs over active funds in the future.
In Fitch’s opinion, flexible equity funds may gain traction in the future, should markets continue to be driven by macro uncertainties and characterised by sharp sector rotations, frequent drawdowns and rapid recoveries. The best performing funds have shown adaptability in 2014, irrespective of style.
The report, “European Equities Funds: Process Adjustments in 2014”, is available at www.fitchratings.com