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Charting the Market: A Boom/Bust Year for Active Management

By:

Head of SPDR Americas Research

Matt takes a look at the full-year performance figures for active managers across a variety of strategies.

Following the systematic selloff at the onset of the pandemic, coordinated central bank efforts, including quantitative easing (QE) and purchase programs aimed at supporting market liquidity, played a major role in stabilizing and improving the overall risk appetite. However, it wasn’t until the world received positive vaccine development news that the foundations of support laid by policymakers – like a bridge loan to an entrepreneur before they are pre-revenue – that a broad-based market rally started.

Despite the strong returns for risk assets, volatility remains elevated as the CBOE VIX Index registered 218 consecutive days above 20 to close out the year.1 With these erratic movements featuring big up and down days, to say 2020 was challenging would be an understatement. And the trends in active management performance reflect the boom/bust nature of last year.

To help inform investors’ decisions on where to be active in a portfolio, this charting the market highlights the full-year performance figures for active managers across a variety of strategies.

Equity: Hit and miss rates

For this analysis, we broke up the Morningstar universe by the traditional nine-box and overseas categories, calculating the percent of managers in each bucket that outperformed their respective prospectus benchmark (hit rate). This allows for more specific takeaways on which type of active manager did well, or poorly, in 2020. As shown below, only three market segments in US-focused strategies had a hit rate above 50%. As a result, I think it’s fair to conclude that most US active managers had a tough year in 2020.

managers outperforming prospectus benchmark

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Footnotes

Bloomberg Finance L.P. as of December 31, 2020
2 Morningstar, as of December 31, 2020
3 “When Indexing Wins and When It Doesn’t in US Equities: Updating and Extending the Purity Hypothesis”, Thatcher, The Journal of Index Investing, December 2018
4 Bloomberg Finance L.P. as of December 31, 2020
5 Bloomberg Finance L.P., as of December 2019, based on the average funds return within the category relative to the average Bloomberg Barclays U.S. Aggregate Bond Index rolling one year return (monthly granularity) and the Bloomberg Barclays U.S. Corporate High Yield Bond Index rolling one year return (monthly granularity) relative to the Bloomberg Barclays U.S. Aggregate Bond Index from January 2010 to December 2019.
6 Bloomberg Finance L.P. as of December 31, 2020 based on the return of the Bloomberg Barclays US Aggregate Bond Index and the Bloomberg Barclays US Corporate High Yield Index
7 Bloomberg Finance L.P. as of December 31, 2020
8 Bloomberg Finance L.P. as of December 31, 2020
9 This mitigates cyclicality or time dependency (i.e., start and end dates) that a straight line 10-year lookback would have
10 Morningstar as of December 31, 2020 based on data from January 2010 to December 2020

Originally Posted on January 12, 2021 – Charting the Market: A Boom/Bust Year for Active Management

Disclosures

The views expressed in this material are the views of SPDR Americas Research Team and are subject to change based on market and other conditions. This document contains certain statements that may be deemed forward-looking statements. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected.

The information provided does not constitute investment advice and it should not be relied on as such. It should not be considered a solicitation to buy or an offer to sell a security. It does not take into account any investor’s particular investment objectives, strategies, tax status or investment horizon. You should consult your tax and financial advisor.

All material has been obtained from sources believed to be reliable. There is no representation or warranty as to the accuracy of the information and State Street shall have no liability for decisions based on such information.

All the index performance results referred to are provided exclusively for comparison purposes only. It should not be assumed that they represent the performance of any particular investment.

Passively managed funds hold a range of securities that, in the aggregate, approximates the full Index in terms of key risk factors and other characteristics. Passively managed funds invest by sampling the index, holding a range of securities that, in the aggregate, approximates the full Index in terms of key risk factors and other characteristics. This may cause the fund to experience tracking errors relative to performance of the index.

Actively managed funds do not seek to replicate the performance of a specified index. The strategy is actively managed and may underperform its benchmarks. An investment in the strategy is not appropriate for all investors and is not intended to be a complete investment program. Investing in the strategy involves risks, including the risk that investors may receive little or no return on the investment or that investors may lose part or even all of the investment.

Equity securities may fluctuate in value in response to the activities of individual companies and general market and economic conditions.

Volatility management techniques may result in periods of loss and underperformance may limit the Fund’s ability to participate in rising markets and may increase transaction costs.

A momentum style of investing emphasizes securities that have had higher recent price performance compared to other securities, which is subject to the risk that these securities may be more volatile and can turn quickly and cause significant variation from other types of investments.

Investments in small-sized companies may involve greater risks than in those of larger, better known companies.

Companies with large market capitalizations go in and out of favor based on market and economic conditions. Larger companies tend to be less volatile than companies with smaller market capitalizations. In exchange for this potentially lower risk, the value of the security may not rise as much as companies with smaller market capitalizations.

Value stocks can perform differently from the market as a whole. They can remain undervalued by the market for long periods of time.

Because of their narrow focus, sector funds tend to be more volatile.

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