In the long run, underperformance is ‘terrible’ for active fund managers

ETF Edge, September 26, 2022

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

S&P Global recently published the Mid-2022 US SPIVA Scorecard, which measures the performance of US actively-managed funds against certain benchmarks. The study found that 51% of domestic large-cap equity funds underperform the S&P 500 index in the first half of 2022, on track for the best pace in 13 years – down from the 85% underperform rate in the previous year. last year.

Anu Ganti, senior director of index investment strategy at S&P Dow Jones Indices, said this was partly due to the market decline. Ganti told CNBC’s Bob Pisani above “Edge ETF” This week, losses in equities and fixed income, as well as increased risk and inflation, have made active management skills even more valuable this year.

Despite the promising numbers, the long-term underperformance remains, as Pisani noted, “astonishing”. After 5 years, the proportion of large-cap companies underperforming by the standard is 84%, and this number 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 groups underperformed, respectively.

Rate of underperformance

Ganti says underperformance rates remain high because former active managers typically have higher costs than passive managers. Because stocks are not normally distributed, active portfolios are often stymied by dominant winners in the stock market.

Also, managers compete with each other, which makes it much harder to generate alpha – in the 1960s active managers had an informational advantage because the market was dominated by investors. retail, but today, active managers primarily compete with professional managers. Other factors include the absolute 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 putting up a bunch of ads in places where you might not be able to,” said Tom Lydon. as much as in ETFs.” Vice President of VettaFi.

Lydon added that there aren’t enough ETFs in 401(k) plans, which is where a lot of active managers come in — 75 cents per dollar into Fidelity funds are made through 401(k) plans. Business 401(k) is dominated by people who make money on large trades, as opposed to low-cost ETFs that don’t make much. With $400 billion in new assets going into ETFs this year, and $120 billion coming from mutual funds, it could be a long time until those lines cross.

“We’re going to have one of those years where the stock market can go down, the fixed income market can go down and active managers might have to buy low-cost underlying shares to sell them. to meet buybacks, this will generate five-end capital gains distributions,” said Lydon. “You don’t want, in a year where you’re the hangout, to receive an unexpected and unexpected year-end gift.”

‘Survival bias’

Another component of the study is “survival bias,” where lost funds merged or liquidated do not show up in the index, and so survival is skewed. The study took into account the entire set of opportunities, including these failed sums, to account for this bias.

As a result, Lydon said, in a market downturn, investors should adopt a longer-term outlook and try not to be a “stock player,” as today’s best manager has may not be the best in the long run.


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