Fitch Ratings found that 80% of European equity funds have underperformed their benchmarks this year and said they are threatened by exchange-traded funds.

In a report “European Equities Funds: Process Adjustments in 2014”, the rating agency said that 2014 is on track to be one of the worst years for active European equity fund management.

The report found that 80% of active European equity funds lagged their benchmark to the end of November 2014, up from 58% in 2013. On average, funds were 2.7% behind their benchmarks, net of fees, as at end-November 2014, compared with 0.6% in 2013.

The ratings agency said defensive sectors and mega-cap stocks, which are large constituents of indices, strongly outperformed, and a strong sector rotation throughout the year, has penalised stock pickers, particularly those showing a quality/growth or mid-cap stock bias.

The report said active European equity funds are threatened by ETFs, given their higher fees and the underperformance this year.

“In Fitch’s opinion, inflows to European equity funds, particularly those coming from US investors, may favour ETFs over active funds in the future,” said the report.

Fitch’s said equity funds may gain traction in the future if markets continue to be driven by macro uncertainties and are characterised by sharp sector rotations, frequent drawdowns and rapid recoveries. The study said: “The best performing funds have shown adaptability in 2014, irrespective of style.”

In the first 10 months if this year net new assets in European ETFs and products have overtaken flows for all previous full-years in the region.

ETFs/ETPs listed in Europe gathered a record $56.2bn in the year-to-date to the end of October, which surpasses any full year for net new assets in the region according to preliminary data from consultancy ETFGI’s end October 2014 Global ETF and ETP industry insights report.

In October European-listed ETFs/ETPs gathered $8.7bn in net new assets despite challenging macroeconomic concerns such as deflation and slow growth in Europe.

The largest net inflows into European ETFs in October were into equities with $5.2bn and then fixed income with $3.6bn. In contrast, commodities had net outflows of $183m.