2020 was about ‘circuit breakers’, ‘black swans’, the Volatility Index at new records, and every single asset class (equities, bonds, property, gold, oil) turned into a rollercoaster ride. Nothing was left unscathed. ‘Be greedy when others are fearful,’ said Walter Buffett. This was the time for active investment management!
Actives love volatility
In December 2019, I wrote about the ‘Quest for Alpha’. The SPIVA Scorecard (S&P DJI) research argues overwhelming evidence that passive asset managers consistently outperform their active counterparts. Over the long term, 10 years plus, 80% of the active managers did not meet the benchmarks.
Of 703 funds tracked, only 13 remained in the top quartile in performance after three years, and two after four years.
Persistency, fees and diversification are hotly debated. Track the index with lower fees is the mantra.
However, many active managers argued that this may be the case for extended bull runs, but in times of volatility, passive managers remained fully invested in the market while active managers could display their expertise, benefits of fundamentals research and agility, taking full advantage of the opportunities in the chaos.
So, did the market turmoil created by COVID-19, followed by unheard-of economic stimulus packages, create the turnaround to support their case?
What did the SPIVA scorecards read for Mid-Year 2020?
‘67% of domestic equity funds lagged the S&P Composite 1500® during the one-year period ending June 30, 2020. Growth funds led across all capitalization segments in the one-year period; 74% of large-cap growth, 83% of mid-cap growth, and 89% of small-cap growth funds beat their benchmarks. However, their recent success was not enough to offset previous underperformance; 92% of large-cap growth, 74% of mid-cap growth, and 75% of small-cap growth funds underperformed over the past 15 years.’
42% of active euro-denominated Europe Equity funds underperformed the S&P Europe 350, rising to 49% over 12 months, and 87% over 10 years. 98% survived the six-month period but only 51% of funds survived the 10-year period.’
‘Over 73% of South African Equity funds underperformed the S&P South Africa 50 over the first six months of the year. Comparing the same funds with a broader benchmark, namely the S&P South Africa Domestic Shareholder Weighted (DSW) Capped Index, only 36% of funds underperformed.’
Time will tell
While the initial research tends to indicate that there was a mixed bag of results for the active managers in the short term, and some certainly made a comeback, the debate continues that in the longer term, actives generally underperform the benchmark. Some active managers will argue that the benefits of buying good value at deep discounts will only bear fruit in the longer term. Time will tell.