Long-term underperformance is “abyssal” for active fund managers

The S&P 500 may be trading around 2022 lows, but a new report finds active managers are having their best year since 2009. The numbers, however, suggest they still have a long way to go.

S&P Global recently released its U.S. SPIVA Mid-2022 Dashboard, which measures the performance of actively managed U.S. funds against select benchmarks. The study found that 51% of large-cap domestic equity funds underperformed the S&P 500 in the first half of 2022, on track to their best in 13 years, compared to underperformance. performance of 85% last year.

This is partly due to the market decline, said Anu Ganti, senior director of index investing strategy at S&P Dow Jones Indices. Ganti told CNBC’s Bob Pisani on “ETF Edge” this week that losses in equities and fixed income, along with rising risk and inflation, have made active management skills more valuable this week. year.

Despite the promising numbers, the long-term underperformance remains, as Pisani noted, “abyssal.” After five years, the percentage of large caps underperforming the benchmarks is 84%, and this percentage increases to 90% and 95% after 10 and 20 years respectively.

The first half of the year was also disappointing for growth managers, as 79%, 84% and 89% of the large, small and mid cap growth categories, respectively, underperformed.

Underperformance rate

Ganti said underperformance rates remain high because active managers have historically had higher costs than passive managers. Since stocks are not normally distributed, active portfolios are often hampered by dominant winners in stock markets.

In addition, managers compete with each other, which makes it much more difficult to generate alpha – in the 1960s, active managers had an informational advantage since the market was dominated by retail investors, but today managers assets are mainly in competition with professional managers. Other factors include the sheer frequency of transactions and the unpredictability of the future.

“When we talk about fees, it can work against performance, but it certainly helps by putting your feet on the ground and showing a bunch of ads everywhere you might not see that as much in ETFs” , said Tom Lydon, vice president of VettaFi.

Lydon added that there aren’t enough ETFs in 401(k) plans, where many active managers are – 75 cents of every dollar invested in Fidelity funds goes through 401(k) plans. . 401(k) activity is dominated by people who make money from large transactions, unlike low-cost ETFs that don’t pay much. With $400 billion in new assets entering ETFs this year and $120 billion from mutual funds, it may be a long time before those lines cross.

“We’re going to have one of those years where equity markets may be down, fixed income markets may be down, and active managers may have to turn to low-cost, core stocks to sell in order to respond. to redemptions, which will create a year-end capital gains distribution,” Lydon said. “You don’t want, in a year where you’ve been the only one hanging around, to receive an unexpected and unwanted end-of-year gift.”

‘Survival bias’

Another element of the study is the “survival bias”, in which losing funds that are merged or liquidated do not show up in the indices, and therefore the survival rate is skewed. The study took into account all the opportunities, including these failing funds, to take this bias into account.

So, Lydon said, amid periods of market decline, investors should take a longer-term perspective and try not to be a “stock jockey” because the best manager today may not be the best. long-term.


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