S&P: Active equity strategies underperforming

Actively managed equity strategies of all shapes and sizes have been underperforming in the long term not solely due to the COVID-19 pandemic, an S&P report said.

The S&P 500 index finished the quarter at -19.6%, its worst quarter since 2008's global financial crisis, according to the report.

And the underperformance of U.S. equities can't solely be blamed on the coronavirus pandemic. As measured by the S&P Composite 1500, in addition to 64% of domestic equity strategies underperforming in the first four months of 2020, 67% underperformed in the past two quarters.

"Active managers sometimes seek to soften the conclusions of our regular ... reports by arguing that, while index funds may have the advantage in rising markets, it's in volatile downturns that active management can prove its worth," wrote Berlinda Liu, director of global research and design at S&P Dow Jones Indices and author of the report. "Historical data argue otherwise, and most active managers continued to underperform in 2020."

During the one-year period ended March 31, 72% of domestic equity funds underperformed, slightly worse than the year-end 2019 result of 70%.

International equities performed even worse in the first quarter, as the S&P International 700 lost 22.4%.

Most large-cap equity funds underperformed the S&P 500 across all time horizons. During the first quarter, 54% of all large-cap funds underperformed. In April, the year-to-date underperformance percentage rose to 59%.

And despite there being pockets of success for active managers in the three years ended March 31, these strategies still lagged their benchmarks over the long term.

Within large-cap equities, large-cap growth was the one bright spot. In the past two quarters, 75% of large-cap growth strategies outperformed in the past two quarters. However, 91% lagged the S&P 500 Growth index for the past 15 years.

The S&P noted similar performance results with mid- and small-cap strategies. Sixty-four percent of all midcap and 57% of all small-cap funds topped their benchmarks in the past two quarters, mostly supported by the strong performance of the larger brand names. Still, their short-term success had little impact on their long-term scores as 82% underperformed over the past 15 years in both categories.

"Early 2020 results rebut the view that active funds navigate market turmoil better than index-based funds. Even where results are favorable, the data show the difficulty of market timing. Mixed results in the short term did not change active funds' tendency to underperform indices over the long term," Ms. Liu added.

Performance with international equities and fixed income told a similar story. Despite the short-term success of global bond funds and international small-cap equity funds, most managers lagged their indexes across all categories for any periods of three years or longer.