Many large-cap active managers are beating their benchmarks, despite 2022’s market tumult
A volatile market is traditionally a strain on active managers as they navigate their clients’ portfolios, but 2022 has proven to be an unconventional year for their operations.
According to the SPIVA U.S. Scorecard, a new study by S&P Global, large-cap active managers are experiencing the best year against their benchmarks since 2009.
On average about 68% of large-cap managers underperform their benchmarks, but the study found that only 51% underperformed in the first half of this year.
“Historically, beating the benchmark is very tough,” Anu Ganti, senior director of index investment strategy at S&P Dow Jones Indices, told CNBC’s Bob Pisani on “ETF Edge” on Monday.
“And there’s a few key reasons why we saw this tail wind in the first half of the market.”
Ganti said the declining market has brought losses across equities and fixed income, as well as rising rates and rising inflation. This type of trading environment enhances the value of active management skills, she said.
“No. 1 is rising dispersion, which measures the spread among returns in an index,” she said. “The greater that dispersion is, the greater the opportunity to add value from stock selection.”
According to the SPIVA study, higher dispersion implies a greater possibility of generating above-average performance through judicious stock selection. But it also implies a magnified risk of selecting a laggard, resulting in plenty of opportunities to both add and lose value.
“Two other points for you,” Ganti said. “Historically, we’ve seen that active portfolios tend to be closer to equal in cap weighted. So perhaps that was another tail wind of the underperformance of mega caps. And finally, we’ve seen the recovery in value after decades of underperformance. These are all some of the reversals this year that potentially played a role.”
Not only is 2022 a slightly better year for individual advisors, but larger firms like Capital Group and Morgan Stanley are also entering the ETF space.
“It is good news for the ETF space,” Tom Lydon, vice chairman of VettaFi, said in the same segment.
“We hope that we’re going to see less fees, we think we’re going to see a lot more tax efficiency,” he said. “Trading costs have come down, which are all things that work against you trying to beat that benchmark.”
But Lydon also questioned why managers seeking to outperform aren’t looking beyond sectors with diminishing weighting in the S&P 500, like energy and utilities.
“If you’re reading the tea leaves and just getting the signals from economists in the markets, you think you would have pushed a little bit more in,” he said. “I think there’s too much sector hugging, which is impeding the ability of advisors and managers to beat their benchmarks.”
Since first being released in 2002, the SPIVA U.S. Scorecard has monitored the debate between active versus passive management. While the results of the first half of 2022 show promise for fund managers, the long-term results are telling. Eighty-four percent of active managers underperform benchmarks after five years. That jumps to 90% after 10 years, and 95% after 20 years.
So far this year, Ganti said it’s been a “disappointing” cycle for large-, mid- and small-caps growth managers across the board.
“It’s interesting because initially, you would have thought that perhaps they could have tilted towards value which outperformed,” she said. “And perhaps these growth managers were more concentrated in the growthier names compared to our index, and hence they were hurt by that weakness and growth.”
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