Active managers built on their strong performance from Q1, with the majority beating their benchmark for the second consecutive quarter.
The research by Lyxor Asset Management, which monitors the performance of 3,871 active funds across Europe on a quarterly basis, found 55% of active managers beat their benchmark, up from 52% in Q1 and only 28% in Q4 2016.
Equity managers saw the largest level of outperformance, with 63% beating their benchmark in Q2.
Marlène Hassine, head of ETF Research at Lyxor AM, said the receding of political risk fears, dovish central bank policies and improving economic conditions were the key reasons for the outperformance.
Populism fears seem to have receded for the timebeing after both far-right leader Geert Wilders and National Front leader Marine Le Pen were defeated in the Dutch and French elections, while little risk is being attached to the German elections later this month.
Small-cap equity funds posted the strongest performance while European and global equity fund managers also saw major improvements.
Hassine said: "[Active equity funds] also captured the start of the Q2 rebound for more defensive areas like the low beta after their strong underperformance in H2 2016. This time, their defensive positioning has proven successful, unlike in 2016.
"European small-caps also staged a strong rebound last quarter, continuing a trend established in previous Lyxor research - active management still tends to be more efficient in less liquid market segments."
In the fixed income space, managers found the environment more difficult to navigate with only 35% of managers outperforming.
This was largely due to the continuing low interest rate environment, which saw only 33% of government bond and 24% of EMD managers outperforming.
In terms of flows, equity ETFs saw €157bn flows this year versus €1.5bn in 2016 as a result of improved performance.
Hassine said: "Our findings highlight just how important fund selection is. Knowing where to exploit the skills of an active manager, and where to opt for low cost passives can be critical. Our study can really help investors make the right choices."
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