Chart of the Week: Halftime Huddle – YTD Performance & the Future of Active Management

YTD 2012 U.S. Equity Fund PerformanceAs we pass the halfway point, we thought it would be interesting to check in on the performance of the U.S. equity mutual fund universe across the various broad style categories – Growth, Value and Blend.[1] Growth was clearly the winning category for the half year period. Through the end of Q2, the average large (AUM > $1bn) actively-managed fund[2] returned 8%; the average Growth, 9.2%; Blend 7.5%; Value, 7.1%.[3] These returns largely mirrored broad style indices; the Russell 1000 Growth returned 9.2% and Russell 1000 Value 7.3%.

We thought it would be compelling to throw in the S&P 500 (which returned 9.5%)[4], to view year-to-date (YTD) outperformance of the industry’s favorite equity market benchmark. While pitting performance against the S&P 500 is, in general, an inaccurate and incomplete barometer of an equity fund’s worth when looked at irrespective of investment strategy and horizon, particularly over the short term, the market and media have made it a habit to use the index as a universal benchmark (though it’s style is large-cap Blend or Core).

As seen in the above chart measuring return (Total Annualized Return YTD) and volatility (Total Annual Standard Deviation), about 25% of total funds and 26% of total assets (130 of 530 total funds and $764 billion of $2.9 trillion total AUM, respectively) outperformed the S&P 500.

When looking at outperformance, Growth again was the place to be. Growth funds, which comprise 37% of total funds and 34% of total assets in the universe, made up the vast majority of YTD outperformers (72% of excess returning funds and 79% of assets ($602billion)), though with considerably higher standard deviation on average. Blend funds, also representing 37% of total funds yet with 44% of total assets, accounted for 19% of excess-returning funds and 12% of assets. Value, comprising 26% of funds and 23% of total assets, represented only 8% of funds and 9% of excess-returning assets. The top performer (and also most volatile), however, was a Value fund, Bruce Berkowitz’s Fairholme (FAIRX).

Looking at outperformance within style categories:

  • Growth – Most likely to outperform; almost half (94 out of 199) of Growth funds and 60% of the category’s AUM outperformed (bias towards larger funds)
  • Blend – 13% of funds and 7% of assets outperformed (bias towards smaller funds)
  • Value – 8% of funds representing 11% of assets outperformed

While this picture is interesting from a short-term monitoring and risk standpoint, it is much more myopic and narrow than fund investors typically look to make crucial decisions. With investors’ specific targets around capital appreciation and preservation, deeper analysis of ‘the why’ behind style performance – whether of a single fund or of a broad style category – is certainly warranted. This is especially so when considering the persistently difficult post-2008 climate that active managers have faced, marked by the perennial risk on/risk off patterns due to factors including the European debt crisis and other exogenous (China) and endogenous (monetary policy and QE; fluctuations in economic indicators and corporate earnings; and the debt ceiling showdown) factors that have impacted the strength of the economic recovery in the U.S and made the financial markets extremely shaky by historical standards.

Considering a longer horizon, and highlighting the challenge of active equities management in the post-2008 climate, only eight funds have managed to consistently outperform the S&P[5] in every year since 2009. Further, none of those are blend funds, the closest from a style perspective to the composition of the S&P 500.

From an AUM standpoint, investors’ general tendency to shed risk in the post-2008 era, moving equities allocations to alternatives or fixed income for instance, has also hit active equities management, as investors transfer equities allocations to passive strategies that aim to track benchmarks.

Weston Tompkins, head of equity manager research at Towers Watson, recently told the FT that post-2008 has been the worst period ever for active management strategies, leading even those with the longest horizons (e.g. public plans) to reallocate U.S. equity exposure to passive strategies, accelerating the institutional flight from active managers of all shades and styles. At current flow rates, passive vehicles will account for 50% of institutional U.S. equities by the end of 2014. With investors’ tendency to chase returns, asset managers may only be witnessing the middle of this asset migration yet.

With this in mind, it is interesting to note the recent launch of actively-managed equity products catering to this de-risking and thus fighting to keep investor money in the active category.


[1]As categorized by Morningstar. Though debate amongst practitioners around style peer groups and classification bias is often disputed:

[2] Active funds above $1 billion in AUM with 6 months of history and excluded duplicate share classes.

[3] Net of fees.

[4] Total Return, including dividends.

[5] Total Return, including dividends.

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