The latest SPIVA Global Scorecard of the S&P Dow Jones Indices released last week found that while markets continued to favor larger companies, the majority of actively managed funds were struggling to keep up with their benchmarks.
Namely, out of 56 equity and fixed income fund categories analyzed during the six months ended June, a majority of funds underperformed in more than two-thirds of the categories reported. Of the 8,417 unique funds represented in all semi-annual statistics, 64 percent of individual funds underperformed their assigned benchmark.
Commenting on the data, Matt Olsen, Morningstar’s director of manager research, acknowledged that it was a tough market for fund managers, particularly amid “wildly different results” across approaches. style (value versus growth) and market capitalization (large versus small). .
“At Morningstar, we believe this increases the need for in-depth fund manager research. Our rating process has proven that over time, our highest-rated managers outperform our lowest-rated managers,” Olsen said.
He, however, cautioned against making any inferences about the performance of fund managers based on their results over the past six months.
“The long-term results are more compelling and more important to consider,” he said.
“A thorough analysis of a fund manager’s investment process and people is crucial to determine whether they truly possess differentiated skills in stock selection and market factor analysis.
“The manager’s ability to adapt in a dynamic investment market landscape is crucial today. Some managers do it very well.
While recognizing that this is a “tremendous time” for large-cap growth in the U.S. market, meaning managers with a value-oriented investing philosophy and avoiding high-tech stocks While PE would have suffered, Olsen said that doesn’t mean value is a market factor. should be completely rejected.
“We currently find ourselves in a potentially short- to medium-term environment in which markets have priced in a spike in inflation, with the short-term assumption that interest rates may continue to fall – which they have actually started to do in terms of 10-year government bonds. returns over the last 12 months, for example,” Olsen said.
“It was an ideal environment for growth stocks as investors priced their valuations into the likelihood of discount rates falling,” he said.
The performance of growth as a global factor could reverse, however, Olsen said, especially if the world enters a period of long-term rising interest rates.
“Value, as a factor, could really rebound over the next 10 to 20 years if we see a reversal of the 40-year downward trend in interest rates since the early 1980s. then much more difficult for growth stocks to outperform as they have during periods of long-term declines in discount rates,” he said.
“I think active management can certainly add value in the future. »
Looking specifically at Australia, Olsen highlighted an “interesting area of strong performance” in banking stocks.
He said this could be due to a number of reasons, including a sectoral rotation of resources, an increase in offshore allocations to Australian banks and the strong underlying fundamental performance of local banks in terms of margin management and low levels. loan losses.
“A manager’s ability to rotate and pivot within that sector or overweight the sector through solid analysis would allow them to beat their peers. Some managers cover certain areas of the market better than others,” Olsen said.
“I would say that active managers certainly have good opportunities to outperform if they can get it right. Research on managers can reveal these relative strengths and weaknesses.
