- Correlation and dispersion metrics point to an environment that may be conducive for active small-cap managers
- Overall, performance trends for US active managers have recently been unfavorable, with the exception of growth managers
Proponents of active strategies often point to the ability of active managers to rotate into defensive segments or increase cash positions during market downturns as a key reason why they continue to use such strategies within portfolios.
Putting aside whether active strategies really perform better in severe market downturns, it’s fair to examine even whether this approach is a good use of capital in general. The approach allocates for something that happens roughly every 10 years1 and costs more than 30 times the fees of lower-cost index-based solutions.2 If the goal is to miss out on major down moves, a simple trend-following strategy using the last price of the S&P 500® Index versus its 200-day moving average as a trigger to move to cash from a low-cost indexed vehicle could provide the same theoretical objective at a fraction of the cost.
The costs of the active route are even harder to comprehend given the underperformance trends of active strategies and the relative loss of wealth during the last bull market, where 42% of active managers underperformed their benchmark by an annualized average of 2.2%.3 Overall, the high fees, frequent tendency for capital gains dividends and persistent underperformance are major potential costs for an approach that hopes an active manager can make the right decision as the market rolls over and bounces back.
In this edition of Charting the Market, we examine the environment for active management as well the performance trends of active managers this year to see if they have lived up to the expectations of performance prowess during a downturn.
1 Bear markets occur an average of every 10 years based on data from 1926 to 2020, Bloomberg Finance L.P.
2 The average US Large Cap Blend Manager charges 86 basis points versus the 3 basis points charged by ETFs tracking the S&P 500 Index, Morningstar as of 06/30/2020
3 Average figures for funds within the US Large Cap, Mid Cap, and Small Cap universe from 3/31/2009 to 02/28/2020, Morningstar as 06/30/2020
4 FactSet as of 06/30/2020
5 FactSet as of 06/30/2020 based on the cross-sectional volatility for S&P 500 and Russell 2000 constituents from 1990-2020
6 Three month rolling sector dispersion. Bloomberg Finance L.P. as of 06/30/2020 based on the GICS Sector returns for the S&P 500 since 1990
7 Active managers’ holdings update; What are your neighbors doing?, Bank Of America 06/30/2020
8 Based on the S&P 500 Growth Index as of 06/30/2020 per data from Bloomberg Finance L.P.
CBOE VIX Index
A measure of market expectations of near-term volatility conveyed by S&P 500 stock index option prices.
S&P 500 Index
A popular benchmark for US large-cap equities that includes 500 companies from leading industries and captures approximately 80% coverage of available market capitalization.
Originally Posted on July 14, 2020 – Charting the Market: Have Active Managers Excelled in the Current Environment?
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.
Investing involves risk including the risk of loss of principal.
The whole or any part of this work may not be reproduced, copied or transmitted or any of its contents disclosed to third parties without SSGA’s express written consent.
Disclosure: Interactive Brokers
Information posted on IBKR Traders’ Insight that is provided by third-parties and not by Interactive Brokers does NOT constitute a recommendation by Interactive Brokers that you should contract for the services of that third party. Third-party participants who contribute to IBKR Traders’ Insight are independent of Interactive Brokers and Interactive Brokers does not make any representations or warranties concerning the services offered, their past or future performance, or the accuracy of the information provided by the third party. Past performance is no guarantee of future results.
This material is from State Street Global Advisors and is being posted with permission from State Street Global Advisors. The views expressed in this material are solely those of the author and/or State Street Global Advisors and IBKR is not endorsing or recommending any investment or trading discussed in the material. This material is not and should not be construed as an offer to sell or the solicitation of an offer to buy any security. To the extent that this material discusses general market activity, industry or sector trends or other broad based economic or political conditions, it should not be construed as research or investment advice. To the extent that it includes references to specific securities, commodities, currencies, or other instruments, those references do not constitute a recommendation to buy, sell or hold such security. This material does not and is not intended to take into account the particular financial conditions, investment objectives or requirements of individual customers. Before acting on this material, you should consider whether it is suitable for your particular circumstances and, as necessary, seek professional advice.