Active managers fail to capitalize on Covid volatility

Mar 23rd, 2021 | By | Category: ETF and Index News

The majority of active equity managers in the US failed to beat their benchmark indices in 2020, according to the latest S&P Indices Versus Active (SPIVA) Scorecard, despite the turmoil caused by the Covid-19 pandemic offering numerous opportunities for outperformance.

US active managers fail to capitalize on Covid volatility

The majority of active equity managers in the US failed to beat their benchmark indices in 2020.

The SPIVA scorecard, which is considered the de facto scorekeeper of the ongoing active vs. passive debate, analyses the performance of actively managed funds against their relevant S&P benchmark index.

The findings from the most recent scorecard, which looks at fund performance up to 31 December 2020, support the ongoing argument that passive funds, such as index-tracking ETFs, pack a better punch than their actively managed counterparts.

According to the scorecard, 57% of actively managed broad US equity funds lagged the S&P Composite 1500 during 2020.

Large-cap US equity funds fared worse with 60.3% failing to beat the S&P 500, marking the eleventh consecutive year that a majority of active managers in this segment have underperformed. The results are even more dire when comparing performance over longer time horizons – 69.3% and 75.3% of large-cap managers lagged the S&P 500 over the most-recent three and five-year periods respectively.

Active managers focused on smaller-capitalization stocks did somewhat better than their large-cap peers during 2020 – 51% underperformed the S&P MidCap 400 while a small majority (54%) outperformed the S&P SmallCap 600. However, according to Craig Lazzara, Global Head of Index Investment Strategy at S&P Dow Jones Indices, part of this success may be attributed to ‘style bias’.

Lazzara defines style bias as any systematic tendency in an actively managed portfolio – for example, a portfolio that persistently tilts toward growth stocks would exhibit a growth bias (this is different from a manager making a tactical allocation to growth stocks based on relative attractiveness).

Lazzara’s analysis infers that mid and small-cap managers tend to exhibit size bias – a habitual tilt to larger-cap stocks relative to their benchmarks. This dynamic tends to help these managers beat their benchmarks during periods when larger-cap stocks outperform their smaller-cap counterparts, as was the case during 2020 – the S&P 500, S&P MidCap 400, and S&P SmallCap 600 returned 18.4%, 13.7%, and 11.3% respectively last year.

Style-focused fund managers performed favourably during 2020, especially those focused on growth stocks. A healthy 62% of large-cap growth funds, 83% of mid-cap growth funds, and 86% of small-cap growth funds beat the S&P 500 Growth, S&P MidCap 400 Growth, and S&P SmallCap 600 Growth, respectively. This did little to improve their longer-term relative performance, however. On a 20-year horizon, a paltry 4%, 10%, and 6% of large, mid, and small-cap growth funds outperformed their benchmarks, respectively.

Two-thirds (67%) of large-cap value funds beat the S&P 500 Value during 2020, while a slight majority (56%) of small-cap value funds outperformed the S&P SmallCap 600 Value; however, just under half (47%) of mid-cap value funds topped the S&P MidCap 400 Value. Over a 20-year horizon, just 23%, 15%, and 24% of large, mid, and small-cap value funds outperformed their benchmarks, respectively.

For US-domiciled funds investing in global markets, results in 2020 were mixed. Roughly half of global, global ex-US, global ex-US small-cap, and emerging market funds beat the S&P Global 1200, S&P International 700, S&P Developed Ex-US SmallCap, and S&P/IFCI Composite, respectively. The results similarly turned negative over longer horizons with around 60%, 70%, and 90% of fund managers lagging behind their benchmarks over three, five, and 20 year periods.

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