Passive funds outperformed their active peers in 2022 by a greater percentage than the year earlier, according to data from Hargreaves Lansdown.
Out of 188 active funds, only 26 or 14% outperformed the Vanguard FTSE UK ALL Share Index, a tracking fund.
This is in stark comparison to 2021, where 38% of active funds managed to outperform the Vanguard passive.
According to analysts at Hargreaves Lansdown, this shouldn’t come as a surprise given “one year is a short time period, giving active managers limited scope to outperform.”
Another reason was the success of the oil and gas sector.
Shares in Shell and BP, as well as British Gas owner Centrica, soared as energy bills rose, which boosted the FTSE All Share and in turn passive funds.
“Typically, UK managers have a greater proportion invested in small and mid-sized companies when compared to their passive equivalents and historically this has been a tailwind for relative performance,” said Hal Cook, senior investment analyst at Hargreaves Lansdown.
“The Oil & Gas sector exposure is more varied, but with the rise of responsible investing, it is now more common for UK equity managers to have lower exposure to this area of the market.”
Passive funds continued to increase their market share. Some 10% of all assets invested in mutual funds in 2010 were passive, but this has risen now to around 25%.
Hargreaves Lansdown suggests, however, that it isn’t time to switch to passive funds just yet.
Specifically, the data it cites is based on an average, meaning some active funds will still outperform passive funds.
Secondly, the data simply tells you if a fund outperformed or underperformed, not by how much.
“One year of a large outperformance and four years of a small underperform can still result in outperformance over the long-term,” said Cook.