This website uses cookies to collect usage information in order to offer a better browsing experience. By browsing this site or by clicking on the "ACCEPT COOKIES" button you accept our Cookie Policy.

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

By:

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

Footnotes

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

Glossary

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.

Click here to read the full article

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

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.

Bonds generally present less short-term risk and volatility than stocks, but contain interest rate risk (as interest rates rise, bond prices usually fall); issuer default risk; issuer credit risk; liquidity risk; and inflation risk. These effects are usually pronounced for longer-term securities. Any fixed income security sold or redeemed prior to maturity may be subject to a substantial gain or loss.

The value of the debt securities may increase or decrease as a result of the following: market fluctuations, increases in interest rates, inability of issuers to repay principal and interest or illiquidity in the debt securities markets; the risk of low rates of return due to reinvestment of securities during periods of falling interest rates or repayment by issuers with higher coupon or interest rates; and/or the risk of low income due to falling interest rates. To the extent that interest rates rise, certain underlying obligations may be paid off substantially slower than originally anticipated and the value of those securities may fall sharply. This may result in a reduction in income from debt securities income.

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.

In accordance with EU regulation: The statements in this document shall not be considered as an objective or independent explanation of the matters. Please note that this document (a) has not been prepared in accordance with legal requirements designed to promote the independence of investment research, and (b) is not subject to any prohibition on dealing ahead of the dissemination or publication of investment research.

Any trading symbols displayed are for illustrative purposes only and are not intended to portray recommendations.

trading top