Charting the Market: Tide Turns on Active Manager Performance in Q2


Head of SPDR Americas Research

  • Active US equity managers saw the tide turn in the second quarter, as correlation and dispersion factors were not overly favorable
  • Only three US equity segments now have more than 50% of managers outperforming on the year, two of which are within value categories
  • Active fixed income managers, however, are having a stellar year, led by over 90% of Intermediate-Core Plus strategies beating their benchmark

Coming into the second quarter, more than 50% of active US equity managers were outperforming their benchmarks in six out of the nine traditional US style box segments. Given that only three areas had that high of a hit rate in 2020, this year was shaping up to be a bounce back for active. That is, until the tide turned on some of the factors that are conducive to active outperformance: correlations and dispersion.

This turning of the tide within equity differs from the performance of active fixed income mandates, however. Unlike equity, the majority of active managers are still beating their benchmark on the year within fixed income.

In this charting the market, I will dive deeper into these performance trends and explore what to consider when constructing blended active and passive portfolios for the second half of 2021 and beyond.

Falling Dispersion and Correlations Reduce Alpha Opportunities

A low correlation across assets indicates the return environment is more differentiated and not clustered. High return dispersion (disparity between winners and losers) indicates alpha generation opportunities may be abundant, provided managers overweight the correct exposure.

In Q2, both metrics were not overly favorable for active managers. For stocks within the S&P 500, pairwise correlations came in just slightly below average in Q2. However, dispersion fell to the bottom 3rd historical percentile. Within mid caps and small caps, correlations registered levels roughly in line with long-term averages and dispersion also fell well below average levels.1 With neither of these metrics entirely favorable, this presented headwinds — with dispersion likely the greater driver given correlations are still “near” averages.

A similar trend of falling dispersion was witnessed when moving up a level to sectors. As shown below, dispersion was steadily increasing in Q1 sector. In late April, however, dispersion started to decline and came close to approaching long-term averages before turning higher in the last few days of June. Both single stock level and sector dispersion falling clearly created a headwind for active equity managers to continue their pace from Q1 into Q2.

Sector Dispersion

Sector Dispersion


1 Bank of America Merill Lynch, US Mutual Fund Performance Update, July 2, 2021.


Bloomberg Barclays US Corproate High Yield Bond Index: A rules-based, market-value weighted index engineered to measure publicly issued non-investment grade USD fixed-rate, taxable, corporate bonds.

Bloomberg Barclays US Aggregate Bond Index: A rules-based, market-value weighted index engineered to measure publicly issued investment grade USD fixed-rate, taxable, bonds.

S&P Small Cap 600 Growth and Value Index: A market capitalization weighted index. All the stocks in the underlying parent index are allocated into value or growth. Stocks that do not have pure value or pure growth characteristics have their market caps distributed between the value & growth indices.

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Originally Posted on July 14, 2021 – Charting the Market: Tide Turns on Active Manager Performance in Q2


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