Volatile markets have traditionally put a strain on active managers navigating client portfolios, but 2022 is proving to be an unconventional year for their operations.
According to S&P Global’s new SPIVA US Scorecard, large-cap active managers are having their best year against the benchmark since 2009.
On average, about 68% of large-cap managers underperform their benchmarks, but only 51% underperformed in the first half of the year, according to the study.
Anu Ganti, senior director of index investment strategy at S&P Dow Jones Indices, told CNBC’s Bob Pisani on Monday’s ETF Edge, “Historically, beating benchmarks is very difficult. It’s difficult,” he said.
“And we have seen this tailwind in the first half of the market for several important reasons.”
Ganti said the market decline had resulted in losses in stocks and bonds, higher interest rates and rising inflation. This kind of trading environment increases the value of active management skills, she said.
“The first is the variance increase, which measures the spread between index returns,” she said. “The greater the variance, the greater the opportunity to add value from stock selection.”
According to SPIVA research, the higher the variance, the more likely it is that smart stock selection will produce above-average performance. However, it also means that the risk of choosing a laggard company is increased, and as a result there are many opportunities to add or lose value.
“Two more points, please,” Ganti said. “Historically, we have seen that active portfolios tend to have roughly equal cap weightings, which was probably another tailwind for megacap underperformance. It’s part of this year’s reversal that played out.”
Not only is 2022 a slightly better year for individual advisors, big companies such as Capital Group and Morgan Stanley are also entering the ETF space.
“Good news for the ETF industry,” said VettaFi Vice Chairman Tom Lydon in the same segment.
“We hope that the fees will be reduced and we believe it will be significantly more tax efficient,” he said. “Transaction costs have gone down. This works against you as you try to break the benchmark.”
But Lydon also questioned why managers looking to outperform aren’t looking beyond sectors that are declining in weight in the S&P 500, such as energy and utilities.
“If you’re just reading the tea leaves and getting signals from economists in the market, you’d think they’ve pushed a little further,” he said. “I think the sector embrace is too strong and hinders the ability of advisors and managers to beat their benchmarks.”
Since its first release in 2002, the SPIVA US Scorecard has monitored the debate between active and passive management. Results in the first half of 2022 show promise for fund managers, but the long-term results speak for themselves. His 84% of active managers are below the benchmark after 5 years. 90% in 10 years and 95% in 20 years.
So far this year, Ganti says it’s been an overall “disappointing” cycle for large-, mid- and small-cap growth managers.
“It’s interesting because at first we thought we might have leaned towards the outperforming value,” she said. “And perhaps these growth her managers were so focused on high-growth stocks compared to our index that they were hurt by the weakness and growth.”