Active funds collectively underperform compared to their passive counterparts, primarily due to their struggle to remain competitive over time. However, exceptions exist, such as global dividend funds, which consistently outperform in this challenging environment.
“Most active fund managers should quit,” stated Stephen Yiu, co-founder of Blue Whale, in a September 2022 Financial Times interview. He believes that many in the industry fail to provide convincing returns. This sentiment echoes the bold prediction of Vanguard’s John Bogle in a 2015 Bloomberg interview: “In 25 or 30 years, they’ll be gone. That seems like an extreme statement, but I think it’s not without possibility.”
The Morningstar European Active/Passive Barometer semi-annual report reveals that active funds largely fail to outdo their passive rivals. Over ten years, ending in June 2023, only four of 43 equity categories saw a majority of active funds surpass their passive counterparts. The overall success ratio for equity funds was a mere 17.1 percent.
Survival challenges
A significant issue for active equity funds is their survival rate. High costs, ineffective stock selection, and lack of scale led to the liquidation of 46.3 percent of these funds in the decade ending June 2023. In contrast, only 37 percent of passive equity strategies faced liquidation during the same period.
Global dividend funds stand out in the actively managed equity fund category. Over the last decade, their success ratio reached 61 percent, with a survival rate of 66.1 percent over the same period.
Active management shows promise in global dividend strategies. Passive funds often lead to sector concentrations by prioritizing high dividend yields, increasing the risk of unsustainable dividends. Actively managed funds, focusing on dividend growth and yield, build more balanced portfolios.
Forward-looking analysis
Actively managed dividend funds excel in assessing dividend sustainability and potential growth through forward-looking analysis. This approach, focusing on a company’s competitive edge, cash flow, and balance sheet quality, enhances stock selection robustness.
Active fund managers are adept at anticipating impacts of regulatory changes and corporate restructurings on dividends, offering an advantage over passive strategies. Actively managed dividend funds have a broader investment universe and more pragmatic approaches to dividend cuts, allowing them to adapt to diverse market conditions.
Active funds aren’t bound by minimum dividend yield requirements at the equity level, allowing for a mix of high-yielding and low or no-dividend stocks. This flexibility is key in responding to market dynamics. During events like the corona pandemic, actively managed funds showed leniency towards companies adjusting dividends. Recognizing the varied reasons behind dividend changes allows for smarter portfolio management.
Top Five Performers
The top five actively managed global dividend funds, ranked by their returns over the 10 years ending 31 October 2023 using the Dutch fund class as a basis, are led by JPM Global Dividend Fund. The fund has been led by Helge Skibeli since mid-2018, who manages the fund with co-managers Sam Witherow and Michael Rossi, who joined him in 2019 and 2023 respectively.
Skibeli oversees JP Morgan’s Global Core team, and also has two other strategies under his belt that do not have a dividend objective but overlap with the global dividend portfolio. The trio leans on JP Morgan’s extensive network of experienced equity analysts. The investment process rests on the solid foundations of JP Morgan’s tried-and-tested framework successfully applied to several equity funds, albeit with some adjustments for the sake of the dividend mandate.
The managers combine a core of so-called dividend compounders with stocks offering high dividend growth and those offering a high dividend yield, with valuation differentials leading the allocation. The 40 to 90 stocks in the portfolio are generally of above-average quality, with the team currently overweight financials, consumer cyclicals and technology versus competitors.
Jeffrey Schumacher is director manager research at Morningstar. Morningstar analyses and evaluates investment funds based on quantitative and qualitative research. Morningstar is one of Investment Officer’s knowledge partners and ranks five mutual funds or providers every week.