March 2016 – ADIFO Global Market Review
Market Recap — The Death of Active Equity Management?
Stock pickers have bitterly complained that the current central bank-driven investment regime has increased equity correlations to levels that make it difficult, if not impossible, to demonstrate their skill. So by this measure, active managers got the perfect environment in Q1 2016: correlations among equities fell to their lowest levels since 2012. So how did the stock pickers do? According to Bloomberg, active fund managers trailed their benchmarks by one of the highest margins in two decades. Research from Bank of America shows that in Q1, just 19% of mutual funds beat the S&P500 index, the fewest since 1998. Managers erred by avoiding utility and consumer staple companies while loading up on financial which put in the worst sector performance in the S&P500. The three most widely held stocks were Alphabet (Google), Visa and JP Morgan Chase, all of which trailed the Index. In case one might believe this was just a US phenomenon, an in-depth study by S&P Dow Jones Indices found that in Europe four out of five active equity funds failed to beat their benchmarks over 5 years, and 86% trailed over 10 years. No wonder low-cost ETFs have grown more than six fold over the past decade to almost $3 trillion.