Updated with correction
Despite rough-and-tumble markets since the COVID-19 pandemic began to impact global markets in February, some active U.S. equity managers, especially those running growth strategies, are moving quickly to snap up investment opportunities thanks to rock-bottom stock valuations.
Market conditions in the quarter ended March 31 wreaked havoc on the returns of active U.S. equity managers and was especially grueling for value managers, Pensions & Investments' analysis of returns of active U.S. equity mutual funds of the 10 largest mutual fund companies showed.
The average excess return of actively managed U.S. equity growth mutual funds over individual fund benchmarks in P&I's universe was 1.4 percentage points in the first quarter. Blended U.S. active equity funds had average underperformance of fund benchmarks of 1.3 percentage points, while value funds produced average underperformance of 3.7 percentage points compared to fund benchmarks.
The S&P 500 index was down 20% in the three months ended March 31.
Despite the optimism of active U.S. equity managers about improving prospects for their investment portfolios, performance and asset growth, a wide swath of long-only active managers still face endangered species status, said Kevin P. Quirk, a principal of Casey Quirk, a Deloitte Consulting LLP business who is based in the firm's Stamford, Conn., office.
"Not much will change even if the performance of active managers improves, not over just a quarter, but over a cycle," Mr. Quirk said.
The firm's data shows that just 23% of active equity managers worldwide that invest in publicly traded markets, representing 41% of total assets under management, consistently deliver excess returns.
With the majority of actively managed equity assets flowing to the small cadre of "really good active equity managers (that) will become very wealthy" and passive management continuing to be a "very viable option" for many investment clients, Mr. Quirk predicted that "mediocre managers who don't distinguish themselves in this opportunistic market face wash out."
After a decadelong bull market, characterized for the most part by low volatility, sources said active U.S. equity managers finally have what they need to differentiate themselves from other active peers and outperform passive managers.
"The path forward has so many rabbit holes that it's hard to predict when the market will hit bottom and recovery will begin, but significant volatility allows active managers to take advantage now of dislocations," said Christopher M. Riley, partner and head of global equity research at Aon Investments USA Inc., Chicago.
"In the ashes and smoke, we are seeing some active U.S. equity managers that are producing really great returns so far this year by buying securities of high-quality companies" with valuations that have sharply declined, Mr. Riley said.
"Being nimble shows how active managers create good long-term value during a period of disruptions. We are seeing strong performance so far this year among active managers investing in some pockets in the market. Relative to passive management, some of these managers look pretty good," Mr. Riley said.
He declined to provide manager names.