A fresh blow for stockpickers as semi-annual survey finds 90% fall short of benchmark
Nine out of ten US equity funds failed to beat the market over the past year, according to a new study that undermines active managers’ claims that they can outperform in more volatile markets.
The semi-annual report on fund manager returns, produced by S&P Global, has long been depressing reading for professional stockpickers, but the scale of the disappointment in the latest figures is likely to fuel further outflows from an industry that is already under pressure.
Money has been draining out of actively managed funds and moving into index-tracker funds at an accelerating pace this year.
The S&P Indices Versus Active (Spiva) scorecard shows that 90.2 per cent of the actively managed US mutual funds that invest in domestic equities were beaten by their benchmarks, when their returns are calculated net of fees.
There was not a single category of domestic fund — whether investing in large-caps, small-caps or a combination, or favouring growth stocks or value stocks — in which more than a quarter of managers succeeded in beating their category benchmark.
“There is nothing redeeming to say about the managers in the equity space,” said Aye Soe, global research director at S&P.
“They said they would provide downside protection and add value in choppy markets. This was their chance to prove themselves and earn their paychecks, but across every category they underperformed. It is embarrassing.”
The latest report covers the 12 months to June 30, which includes the summer 2015 market swoon, the rollercoaster markets of January and February and, after the Brexit vote, the late June sell-off.
It adds to a 14-year body of S&P data that confirms most US equities managers underperform the index, regardless of the category of fund and regardless of the timeframe. Over the past 10 years, 87.5 per cent of domestic equity funds underperformed.
Outside of US equities, however, it includes pockets of positive news. Stockpickers that specialise in emerging markets were more likely than not to beat an EM benchmark in the past year — only 42.2 per cent underperformed — and there were categories of fixed income fund where the average manager beat the index. The best of these were loan funds and municipal debt funds.
There is no evidence that the outperformance can be sustained even in those categories, however. On a ten-year view, 81.9 per cent of emerging markets funds and 74.4 per cent of muni funds are below their benchmarks.
Some $328bn flowed out of actively managed mutual funds in the US in the year to July 31, according to Morningstar, while $401bn flowed into funds that passively track an index, such as those run by Vanguard and BlackRock’s iShares division. The shift has accelerated throughout the year, and July was a record month for outflows from active US equity managers, the research group said.
The market share of passive funds has now passed one-third in the US, alarming some industry managers. With fewer investors analysing the value of a company before investing, critics say, the market’s role in efficiently allocating capital is being undermined. “If we push indexing to an extreme no one will get price signals,” said Matt Peron, head of equities at Northern Trust.
Executives at asset management companies with large active businesses say they can add value in many markets.
“I own some passive strategies, including Vanguard funds, personally,” said Tom Finke, chief executive of Barings, “but would you really take a $100bn pension fund and go all passive? There are areas where active is appropriate, especially for capacity constrained and less liquid strategies, but without a doubt there will be more encroachment from passive in many asset classes over time.”
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