The S&P 500 may be trading near its 2022 lows, but active managers are having their best year since 2009, according to a new report.
S&P Global recently published the SPIVA US Scorecard for Mid-2022. It measures how well a US actively managed fund is performing against a specific benchmark. The study found that 51% of domestic large-cap funds underperformed his S&P 500 in the first half of 2022, the highest rate in 13 years, down from last year’s 85% underperformance rate. doing.
Anu Ganti, senior director of index investment strategy at S&P Dow Jones Indices, said this was partly due to market declines. Ganti told CNBC’s Bob Pisani on “ETF Edge” this week that losses across stocks and bonds, as well as rising risk and inflation, have made active management skills more valuable this year.
Despite the encouraging numbers, long-term underperformance remains “worst,” as Pisani pointed out. After 5 years, the percentage of large-cap stocks that underperform the benchmark is 84%, increasing to 90% and 95% after 10 and 20 years, respectively.
The first half of the year was also a disappointment for growth managers, as the large-cap, small-cap, and mid-cap growth categories underperformed by 79%, 84%, and 89%, respectively.
Performance slump rate
Ganti said that underperformance remains high because historically active managers cost more than passive managers. Because stocks are not normally distributed, active portfolios are often hampered by dominant winners in the stock market.
Additionally, managers compete with each other, making it much harder to generate alpha. In the 1960s, active managers had an information advantage as the market was dominated by retail investors, but today active managers primarily compete with professional managers. Other factors include the high frequency of trading and the unpredictability of the future.
“When you talk about fees, it can work against performance, but it certainly helps with getting your feet on the ground and having lots of ads in places you might not see as much in ETFs,” said Tom Lydon. Vice Chairman of VettaFi.
Lydon added that there are not enough ETFs in 401(k) plans and there are many active managers. The 401(k) business is dominated by people who profit from big trades, but his low-cost ETFs aren’t very profitable. With $400 billion of new assets coming into his ETFs and $120 billion coming from mutual funds this year, it could be a long time before those lines cross.
“Equity markets may fall, bond markets may fall, and it will be a year when active managers will have to sell low-cost basis stocks to meet redemptions. said Lydon. “You don’t want to get an unexpected and unwanted year-end gift in the year you were hanging out.”
“Survivor bias”
Another factor in this study is ‘survivorship bias’. With this bias, the losses of merged or liquidated funds do not appear in the index, skewing survival rates. In this study, we described the entire opportunity set including these failed funds to explain this bias.
Therefore, Lydon said investors should adopt a long-term outlook and avoid becoming “stock jockeys” during market downturns.
