Active Fund Managers Continue to Struggle to Beat the Market in 2024

Active fund managers struggle to beat the market, with only 2.5% delivering top quartile returns in Q1 2024. Japan emerges as a bright spot, while the US market proves challenging. Investors advised to diversify US equity exposure amid higher rates and inflation.

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Trim Correspondents
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Active Fund Managers Continue to Struggle to Beat the Market in 2024

Active Fund Managers Continue to Struggle to Beat the Market in 2024

The latest data from Columbia Threadneedle Fund Watch reveals that active fund managers are still finding it challenging to outperform the market in 2024. In the first quarter of the year, a mere 2.5% of actively managed funds delivered top quartile returns, with Japanese equity funds accounting for 8 out of the 38 outperformers.

When the hurdle rate is lowered to funds that have delivered above the median return, the percentage improves slightly to 18%. The UK smaller companies sector provided a boost for active management, with 22% of funds beating the median. However, the US equity market proved to be the most challenging for managers to traverse, with only 10 out of 139 funds achieving above-median performance.

Japan emerged as a bright spot for solid fund performance, driven by corporate reforms that are unlocking shareholder value. In contrast, the lack of consistent outperformance among US equity funds is disappointing, given their growing share in global portfolios.

Why this matters: The ongoing struggle of active fund managers to beat the market has significant implications for investors who rely on these funds to grow their wealth. As more investors question the value of paying higher fees for active management, the industry faces increased pressure to justify its existence and deliver consistent outperformance.

The latest Fund Watch data is consistent with the findings of previous SPIVA Europe Scorecards, which have highlighted the challenges faced by active fund managers in outperforming their respective benchmarks over both short and long-term periods. The underperformance has been particularly pronounced in the US market, where the majority of active equity funds have failed to beat the S&P 500 over one, five, and ten-year horizons.

The issue of closet indexing, where active funds charge high fees but fundamentally mimic their benchmarks, continues to plague the industry. Legendary investor Bill Miller has criticized closet indexers for "killing active investing" by sacrificing true active management in order to retain assets.

In the evolving economic environment, with higher interest rates and inflation, investors are being advised to ensure their US equity exposure is diversified. Quality companies with consistent income and growth characteristics, as well as traditional dividend-paying stocks, are likely to become more important in the current landscape. However, the upcoming US election later in the year could create short-term noise in the markets, warranting caution from investors.

Key Takeaways

  • Only 2.5% of active funds delivered top quartile returns in Q1 2024.
  • 18% of funds beat the median return, with UK smaller companies doing well.
  • US equity funds struggled, with only 10 out of 139 achieving above-median performance.
  • Japan saw strong fund performance due to corporate reforms and shareholder value.
  • Investors advised to diversify US equity exposure amid higher rates and inflation.