2024 marked the most challenging year for global active equity managers in over 20 years, new findings from Frontier Advisors has shown.
According to the investment company, heightened market concentration and US equity dominance presented significant headwinds for most managers, with many struggling to meet benchmark returns.
Namely, the median global active equity manager underperformed the MSCI All Country World Index (ACWI) by 4.6 per cent – the worst relative return in more than two decades. Just over a third (36 per cent) of managers were able to outperform the benchmark in the year to December.
Ultimately, active managers in global equities had to come up against the dominance of the Magnificent 7 stocks, which were bolstered by artificial intelligence optimism. Managers who held no position in Nvidia, for instance, saw a drag of 3.1 per cent on their performance from that position alone, Frontier Advisors highlighted.
The report also underscored that, while the MSCI (ACWI) returned 17.5 per cent (in USD), the median return of the more than 2,640 stocks in the benchmark was under 1 per cent, emphasising the extreme concentration of market returns.
The second half of 2024 proved to be even more of an uphill battle, with just a quarter (26 per cent) outperforming the MSCI ACWI.
“This year’s benchmark performance was driven by a small group of stocks, which posed a challenge for active managers,” said Brad Purkis, senior consultant at Frontier Advisors.
“The two-thirds of global active managers who did not hold Nvidia faced significant difficulty in outperforming the broader market, and that’s just one of that group of seven dominant companies.”
According to the firm, quantitative managers stood out as a “rare success story” in 2024, able to reap the rewards of a diversified portfolio and effective risk controls. On the other hand, it said that value managers experienced especially challenging outcomes over the year.
Notably, in the case of growth managers, who overall outperformed, market conditions were only conducive to a select group of “high growth” managers, with even moderate growth managers failing to beat the benchmark.
“The results show how narrow market leadership and macroeconomic forces can deeply affect active management outcomes,” Purkis added. “Managers with diversified, systematic strategies fared better during this challenging period.”
Locally, strong performance from the big four banks also created challenges for active managers, many of whom, Frontier Advisors flagged, are underweight in this segment.
However, the underperformance of large resource stocks, such as BHP and Rio Tinto, helped offset this, leaving the median Australian equity manager only slightly behind the benchmark for the year.
Regarding emerging markets, managers in this segment underperformed the MSCI Emerging Markets Index by 0.7 per cent in 2024.
For example, Taiwan Semiconductor Manufacturing Company (TSMC) saw a return of over 90 per cent in 2024 – a damper on managers holding underweight positions relative to its more than 10 per cent benchmark weight.
Even an absolute weight of 5 per cent in TSMC would have dragged returns down by about 4 per cent, Frontier Advisors said.
“Emerging markets provided little relief for active managers,” Purkis said.
“TSMC’s dominance meant that underweight positions were difficult to overcome for many managers.”
Looking ahead, the firm said investors and asset owners are “cautiously hopeful” for improved conditions for active management, with 2025 providing a very strong start for active investors in global equities.
“However, ongoing US equity dominance, concentrated markets and macroeconomic factors continue to influence the investment landscape,” Frontier Advisors said.
