More than half (55.5%) of UK Equity funds failed to beat the S&P United Kingdom BMI benchmark in 2021 but this was still an improvement on other regions, according to a new study by Dow Jones.
Large and mid-cap UK portfolios performed the worst, with 85% of funds in the UK Equity and UK Large/Mid-Cap Equity sectors underperforming.
Small-cap funds, on the other hand did relatively well, with 75.6% beating the benchmark last year. This number is slightly less impressive over the long term, with only 42.4% outperforming over the past 10 years.
Neil Hermon, director of UK equities at Janus Henderson said that innovation in small-cap companies has “enabled them to achieve higher margins through lower variable costs by focusing on market niches”.
He added that this element gives them an advantage over larger UK companies and helps “compound faster organic growth over time”.
While the UK’s performance may appear disappointing to some, it is comparatively better than the 74.8% of funds in the European equity market which failed to beat the S&P Europe 350 index in 2021.
While the majority underperformed, funds in the sector made average returns in excess of 10%.
Likewise, volatility in European equity markets was down to 12.3% from 27.9% the year before, supporting the regions recovery from Covid.
Andrew Innes, Europe, Middle East, and Africa (EMEA) head of global research and design at S&P Dow Jones Indices, said: "In spite of the ongoing Covid-19 pandemic throughout 2021, European equity markets recovered well from the extreme volatility of the previous year.
"Fewer European fund managers beat the benchmark than in the prior year as presumably fund managers in this region may have utilized their skills better during more volatile market conditions than in a comparatively stable environment.”
Many of these portfolios also underperformed in the long-term, with 83.2% falling below the index over the past 10 years.
However, the data runs to the end of 2021 and does not include the first three months of the year, when European funds were hit hard by Russia’s invasion of Ukraine.
Elsewhere, US equity funds made the second highest asset-weighted returns behind Sweden, with the average fund up 32.9% in 2021.
Despite strong gains, 86.5% of portfolios in the sector failed to beat the S&P 500 benchmark which was up 29.3% last year. In the same period, the IA North America sector lagged 3.8 percentage points behind.
Total return of index in 2021
Source: FE Analytics
Furthermore, around 95% of US equity funds fell short of the index over the past 10 years and many other funds in the global sector failed to beat the S&P Global 1200 benchmark last year, with only 18.4% outperforming.
The only regional markets where the majority of funds beat their benchmark last year were Sweden, Germany, France and Italy.