Many large-cap active managers are beating their benchmarks despite 2022’s market turmoil

ETF Edge, 26 September 2022

A volatile market is traditionally a strain on active managers as they navigate their clients’ portfolios, but 2022 is proving to be an unconventional year for their operations.

According to the SPIVA US Scorecard, a new study by S&P Global, large active managers are experiencing the best year relative to their benchmarks since 2009.

On average, around 68% of large-cap managers underperform their benchmarks, but the survey found that only 51% underperformed in the first half of this year.

“Historically, it’s very difficult to beat the benchmark,” Anu Ganti, senior director of index investment strategy at S&P Dow Jones Indices, told CNBC’s Bob Pisani on “ETF Edge” Monday.

“And there are a couple of key reasons why we saw this tailwind in the first half of the market.”

Ganti said the falling market has brought losses across equities and fixed income, as well as rising interest rates and rising inflation. This type of trading environment increases the value of active management skills, she said.

“No. 1 is rising spread, which measures the spread between returns in an index,” she said. “The greater the spread, the greater the opportunity to add value from stock selection.”

According to the SPIVA study, higher diversification means greater opportunity to generate above-average performance through judicious stock selection. But it also carries an increased risk of choosing a latecomer, resulting in plenty of opportunities to both add and lose value.

“Two more points for you,” Ganti said. “Historically, we’ve seen active portfolios tend to be closer to equal in cap weighting. So maybe that was another tailwind of the underperformance of mega caps. And finally, we’ve seen the rebound in value after decades of underperformance . These are all some of the twists and turns this year that have 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 moving into the ETF space.

“This is good news for the ETF space,” Tom Lydon, vice chairman of VettaFi, said in the same segment.

“We’re hoping we’re going to see fewer 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 in trying to beat that benchmark.”

But Lydon also questioned why managers looking to outperform aren’t looking beyond underweight sectors in the S&P 500, such as energy and utilities.

“If you read the tea leaves and just get the signals from economists in the markets, you think you would have pushed in a little bit more,” he said. “I think there is too much sector-hugging, which is hampering the ability of advisors and managers to beat their benchmarks.”

Since it was first published in 2002, the SPIVA US Scorecard has monitored the active versus passive management debate. 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. It jumps to 90% after 10 years and 95% after 20 years.

So far this year, Ganti said it has been a “disappointing” cycle for growth leaders with large, medium and small companies across the board.

“It’s interesting because initially you would have thought that maybe they could have leaned towards value, which did better,” she said. “And maybe those growth managers were more concentrated in the more growing names compared to our index, and so they were hurt by that weakness and growth.”


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