Experts have noted for years that passive stock fund managers have outperformed active ones, providing impetus for investors to focus on index funds.
But last year things looked a little better for many active fund managers, as the S&P 500 generated a negative total return of 18%.
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“Declining markets can make active-management skill more valuable, and our 2022 scorecard identifies several fund categories in which a majority of active managers outperformed,” S&P Dow Jones Indices said in a report.
“In the largest and most closely watched category, U.S. large-cap equities, a slim majority [51%] underperformed,” the report said.
“On the positive side, this was the lowest underperformance rate since 2009 and the fourth best across more than two decades of our annual scorecards.”
Numbers Good and Bad
But “less positively, 2022 was characterized by several specific and unusual active tailwinds that may not persist,” S&P said.
The lowest underperformance rate for active managers in domestic equity categories came in small-cap core, where 40% of active funds underperformed. Small-cap value, at 41%, was the only other category to produce a number below 50%
The numbers were worse in other broad categories. A total of 63% of midcap active stock funds underperformed the S&P MidCap 400 in 2022, and 57% of small-cap funds underperformed the S&P SmallCap 600.
As for the improved performance of large-cap active stock managers, “in years [such as 2022] when the average constituent beats the benchmark [in this case, the S&P 500], it should be easier to select stocks that do so,” the report says.
“And when the very largest companies lag [as was the case in 2022], the ability of active managers to deviate from market-capitalization weightings has a greater chance of generating outperformance.”
Ominous Signs for Active
But don’t get too excited over the improved relative performance of some active stock managers, the report said.
“While the chance of selecting an outperforming U.S. large-cap manager in 2022 was among of the highest of any year this century, celebrations in the active investment community might be qualified for three reasons,” it explained.
“First, because it was still close to a 50-50 split and marginally in favor of the benchmark.
“Second, because, even including 2022’s relatively benign performances, the vast majority of actively managed funds nonetheless underperformed over periods of 10 years or more.”
“And finally, because although the challenges to outperformance diminished in 2022, it was an unusual year and active outperformance might well be harder to attain in the future.”
So what does this mean for your own approach to stock funds? You’re probably best off owning low-fee exchange traded funds, or ETFs, that mimic broad-market indexes, such as the S&P 500 and the Russell 2000, as your core holdings.
Then if there are actively managed funds that you find appealing, you can devote smaller sums to those investments.
