ETFs cane stock picking European money managers in 2014

By Nishant Kumar

LONDON, Jan 4 (Reuters) – Nearly half of the mutual funds picking British stocks fell short of the gains in the broader share market in 2014, raising the prospect they could lose yet more market share to cheaper index fund rivals in 2015.

That marked the worst underperformance by these funds since 2011 and a major reversal of fortunes for the fund managers in Europe's biggest asset management hub. About 85 percent of the funds had exceeded gains in UK's main FTSE 100 Index in 2013, data from Thomson Reuters Lipper showed.

Funds investing across Europe did even worse, with nearly 70 percent of them failing to beat last year's 6.8 percent gain in the MSCI Europe NR EUR Index, the most popular benchmark for Europe-focused stock funds, the data showed.

UK-focused equity funds managed about $400 billion in assets at the end of September, the most by any other country-focused funds in Europe and only about $83 billion less than funds investing across the entire region, Lipper data showed.

Weak market returns and a post-crisis regulatory focus on poor business practice across the financial services industry have seen rules changed to make fund fees more transparent and more managers called to account for poor performance.

And the data for 2014 suggests more tense conversations are likely in the coming weeks as investors sit down with fund managers ahead of their annual rejig of investment portfolios.

Britain's benchmark FTSE 100 index rose 0.7 percent last year, assuming dividends were reinvested. The broader FTSE All Share index, meanwhile, advanced 1.2 percent.

While not a particularly challenging hurdle, funds with combined assets of more than $180 billion failed to beat it, data from fund tracker Thomson Reuters Lipper showed.

Among the larger funds, underperformers included M&G Recovery, which fell 9.6 percent, Schroder UK Opportunities, down 8.6 percent, Scottish Widows UK Growth, down 2.6 percent and Fidelity Special Situations, down 1.7 percent.

The setback will force investors to focus to the value of active management and on fees that are sometimes more than 10 times those of a passive index tracking or exchange-traded fund.

"This is the total opposite of 2013 when active UK funds posted large outperformance of the FTSE All Share," said Laith Khalaf, a senior analyst at Hargreaves Lansdown.

"Performance over both years can be largely explained by active manager's propensity to hold more mid-caps than the market weighting. This served them well in 2013 but has proved a drag in 2014 when it is the blue chips that have outperformed."

The FTSE Mid 250 Index had risen 32 percent with dividend reinvested in 2013 and rose 3.7 percent last year.

OUTFLOWS

Of nearly 500 actively managed UK equity funds tracked by Lipper, 48 percent lagged the FTSE 100 Index, while 52 percent failed to match or exceed the gains in the FTSE All Share Index.

More than a third of the funds lost money during the year.

Looking at the year-on-year comparison, investors could be forgiven for thinking 2014 a momentary blip, but the longer term data suggests it is more a return to the norm.

The 2014 results highlights a longer-term struggle of UK funds, with a majority failing to outperform the FTSE All Share Total Return Index over the last ten years, Lipper data showed, making investors shun active fund managers.

In terms of the impact on funds' collective assets under management — a key measure of a fund management firm's value — disappointed investors pulled more than $17 billion from actively managed British funds last year, Lipper data showed.

While that data is based on estimates formed from what limited data is currently available for December, it is unlikely to quell fears of further outflows as investors reconsider their portfolio investments early in the new year.

That trend of money leaving active funds in favour of passive, index tracking funds is already well in train, particularly in the United States. Britain has some way to go to catch up, but still, passive strategies make up about a quarter of the money invested in the UK stock market, up from 15 percent a decade ago, and collectively took in $880 million in 2014. – REUTERS