In an interesting post. financial analyst Matthew Salter sheds some fresh light on the ongoing debate between those who favour active management, and the passive, index and ETF investing crowd.

According to Salter, “ Its a vitally important discussion to have, and for investors to understand. I weighed in myself  just over a year ago with an article summarizing the latest SPIVA scorecard. (SPIVA is short for rather non-memorably S&P indices versus active funds scorecard). Though they claim the title themselves, its probably true to say that the report is the de facto scorekeeper of the ongoing active versus passive debate. And the evidence has pretty much solidly pointed to the fact that if youre investing in the US, and you plan on investing in equities with a manager that has an active approach, well then you are. um. a delusional optimist (thats a technical term).”

He points out that according to 2012 SPIVA data, only 22.4% of actively managed funds beat the benchmark over three-years – and that’s the best case scenario, for small-caps funds where active management can plausibly make a difference. For mid-caps, only 5.8% of actively managed funds beat the benchmark over three years.

In other words, it’s crazy to opt for active management in the USA. But, things have recently taken a fresh turn.

“The SPIVA scorecard has been ongoing since 2002 for US funds, building up a nice body of evidence which the investing world has I would say gradually been absorbing as investors turn in greater and greater numbers to passive funds. But then, the folks at S&P did something interesting for the 2013 report they included European and British equity funds.

“The results for the European funds were similar to the US funds the clear majority underperformed their benchmarks over a three year period. But the sterling-denominated funds came up with some radically (and I mean radically) different results.”

Here’s a chart illustrating these results, taken from Salter’s piece. As you can see, in the UK, 90% of actively managed equity funds outperformed their benchmark in 2013 (the figure for the US was 54%), and over three years, 77% did (the figure for the US was 22%).

How do we explain this? Are British investment managers just better? Well, not exactly. Writes Salter, “Some commentators have pointed out that the largest companies in the leading UK index (FTSE 100) account for an unusually large percentage of the index the five largest mega-caps account for more than a quarter of the index. Many active managers would be reluctant to put such a large amount of their assets into so few companies. The fact that these mega-caps have underperformed over the last few years means that as a consequence the active managers have outperformed their index.

“So, does this mean that there is still a role for active management? Or was the outperformance by UK managers just a lucky result because small-caps outperformed large caps? Well, this was the first report for the UK produced by SPIVA so its probably too early to say. No doubt future reports will spread more light on the questions raised.”