In a story that is
becoming all too familiar in the asset management industry
, the number of managers outperforming their respective benchmarks exactly halved, according to research conducted by Lyxor.
In its annual report on active and passive fund performance, Lyxor found active managers recorded one of their worsts year in over a decade with just 24% outperforming last year, down from 48% in 2017 and well below the 10-year yearly average of 36%.
Marlene Hassine (pictured), head of ETF research at Lyxor, explained political and economic uncertainties had impacted performance along with monetary policy still on the dovish side.
Furthermore, the more volatile earnings revisions last year, coupled with a less favourable macroeconomic backdrop made active managers’ jobs more difficult.
“Overall, the dispersion of the returns of individual stocks increased throughout the year from a very low level,” Hassine continued. “Meanwhile, the correlations between returns fell sharply post February, making it very difficult for active managers to find independent and diversified drivers.”
The report said another difficulty for active players was investors did not respond rationally to fundamentals last year.
“If they are to succeed, active managers need stock prices to respond to the fundamentals that they picked them for.”
In the equity space, just 27% outperformed, down from 51% in 2017 however, somewhat surprisingly, a bright spot was in US growth managers. Some 75% outperformed, well above the 10-year average of 41%.
Added to this, the probability of selecting a US growth manager that outperformed was high. In order to calculate this, Hassine explained one must look at the dispersion of the funds’ returns against their benchmark in 2018 and compare it to the long-term average for each category.
“The dispersion in the US growth equity universe was close to average and a high percentage of active funds outperformed their benchmark, [meaning] the probability of selecting a fund that outperformed was high.”
Along with US growth, European and US small cap funds also performed well last year while Japanese strategies were in line with the average.
“[In contrast to US growth], the dispersion in the European growth equity universe was low and a limited percentage of funds outperformed, so the probability of investing in an outperforming fund was low,” she said.
Hassine shot a warning to active managers hoping for an easier 2019 than what happened last year. Risks, she said, still remain such as Brexit, trade war, slower growth in Europe and China and limited rate moves could continue to impede performance.
“In our view, selecting the right investment vehicle will be all the more important in addition to choosing the right asset allocation to generate returns.”
Earlier this year, S&P Dow Jones Indices released its bi-annual SPIVA scorecard, which found US equity managers suffered their fourth worst year on record since 2001 last year.
