The latest S&P Dow Jones Indices’ SPIVA Global Scorecard released last week revealed that as markets continued to favour the largest companies, a majority of actively managed funds struggled to keep up with their benchmarks.
Namely, across 56 equity and fixed income fund categories analysed over the six-month period ending in June, a majority of funds underperformed in over two-thirds of reported categories. Of the 8,417 unique funds represented across all the half-year statistics, a similar 64 per cent of individual funds underperformed their assigned benchmark.
Commenting on this data, Matt Olsen, Morningstar’s director of manager research ratings, agreed it has been a challenging market for fund managers, especially amid “wildly different outcomes” by both style (value versus growth) and market cap (large versus small) approaches.
“This means a bias towards or away from these factors would have helped or hindered,” he told InvestorDaily.
“At Morningstar, we feel this heightens the need for insightful fund manager research. Our ratings process has proven that over time, our more highly rated managers outperform our more lowly rated managers,” Olsen said.
However, he cautioned against making inferences about fund managers’ performance based on their results over the past six months.
“The longer-term outcomes are more persuasive and important to consider,” he said.
“A deep analysis of a fund manager’s investment process and people is crucial in assessing whether they actually have differentiated skills in stock selection and the analysis of market factors.
“The manager’s ability to pivot in a dynamic investment market landscape is crucial at the moment. Some managers do this very well.”
While acknowledging that it has been a “great period” for large cap growth in the US market, meaning that those managers with a value investing philosophy that avoid high PE tech stocks would have suffered, Olsen said this does not mean value as a market factor should be completely dismissed.
“We are currently in a potentially short to medium-term environment where markets have factored in peak inflation, with the near-term forward view that interest rates may continue to fall – which indeed they have started to in terms of 10-year government bond yields over the last 12 months, for example,” Olsen said.
“This was a great environment for growth stocks as investors impute the likelihood of lower discount rates into their valuations,” he said.
The performance of growth as a factor globally could, however, reverse, Olsen said, especially if the world enters a period of long-term rising interest rates.
“Value as a factor could really bounce back in the next 10 to 20 years if we see a reversal of the 40-year trend in falling interest rates since the early 1980s. It would make it much harder for growth stocks to outperform as they did in periods of long-term falling discount rates,” he said.
“I think active management can certainly add value in the future.”
Looking specifically at Australia, Olsen highlighted an “interesting strong area of performance” in banking stocks.
This, he said, could have been due to a number of reasons, including sector rotation out of resources, increased offshore allocations to Australian banks and the strong underlying fundamental performance of local banks in terms of margin management and low levels of loan losses.
“A manager’s ability to rotate and pivot into this sector or overweight the sector with solid analysis would enable them to beat their peers. Some managers cover certain sectors of the market better than others,” Olsen said.
“I would say that active managers certainly have some good opportunities to outperform if they can get it right. Manager research can uncover these relative strengths and weaknesses.”
