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Only 11% Of Large Active Funds Beat Their Benchmark Last Decade

Courtesy of ZeroHedge View original post here.

There is a reason why, depending on how one calculates it, passive, i.e. index and ETF, fund assets under management have either already surpassed active, or will do so in the next two years

… and more so than the exorbitant fees charged by active investors which can reach 3% and 50% in some grotesque, megalomaniacal cases, it is due to the dismal performance of the actively managed fund industry, which for 10 years in a row failed to outperform the broader market (although with central banks now actively micromanaging the stock market, one can hardly blame them – after all, with no risk of a drop, there is no need to hedge exposure).

However, it's not just failing to outperform the market that has resulted in a near record 8 consecutive months in hedge fund outflows and the fewest hedge fund launches since the year 2000.

According to Bank of America, only 11% of large cap active funds beat their benchmarks for the decade, which was not only a "tough environment for active managers", but was catastrophic for the confidence of their LPs, who redeemed the most capital in years despite 2019's stellar S&P performance.

Here, according to BofA's Jill Carey Hall, is why the 2010s was a decade hedge funds and active investors can't wait to forget: "Only 11% of large cap active funds beat their benchmarks for the decade. The past 10-year period posed unique challenges for active funds." 

The most deleterious aspect was the fight against a wave of redemptions, a fight which countless hedge funds lost, and led to the shuttering or family office conversion of some of the most respected funds in 2019.

As a result of this tremendous industry shift, passive funds now represent almost half of all US domiciled fund assets vs. just ~20% back in 2009.

Meanwhile, if hedge funds wish to rage at someone for their dismal performance, they may as well address their grievances to the Marriner Eccles building: the benchmark itself was particularly hard to beat, as the 257% return for the S&P beat almost every other broad market index.

And another fascinating fact from BofA: within the S&P 500, the percentage of stocks that outperformed the benchmark for the decade was a mere 32% vs. almost half in the prior decade. In other words, just a handful of stocks generated the bulk of the S&P's return, someone we discussed over the weekend in "Just Two Companies Accounted For Nearly 20% Of The Market's Entire 2019 Return."

Finally, and as shown in the chart above, leadership was concentrated amongst mega cap companies which according to BofA, "are difficult to overweight given the amount of fund concentration required."

Below we present some more observations on active management courtesy of BofA:

While benchmarks posted the best year since 2013, large cap active managers closed 2019 with just 28% outperforming their Russell 1000 benchmarks, the lowest hit rate since 2016 when only 19% of funds beat their benchmarks. This follows two straight years of over 40% hit rate (48% in 2017 and 43% in 2018). Quantitatively-focused funds struggled even more in 2019, with just 12% beating the Russell 1000 index, underperforming by 4% on average.

Why the struggle? Anti-yield and anti-quality bias

With persistently low interest rates over the past decade, the reach for yield was prevalent. Amid equity factors, High Dividend Yield was the best performer of the decade, returning 315% over the 10-year period vs. the S&P 500's 257% gain. But large cap active managers consistently maintained a lower dividend yield than the benchmark (32bps lower on average) during the period.

Additionally, dividends drove more than a quarter of the S&P's total return during the decade and active managers' lower yield exposure likely dragged on their performance. Large cap active managers were also consistently underweight High Quality stocks ("B+ or better"), which outperformed Low Quality ("B or worse") stocks by 68ppt during the decade. Active funds' exposure to High Quality stocks were 2.5% lower on average during the period.

One final reason why outperforming the market was nearly impossible in 2019, and the past decade, performance dispersion for large cap equities rose in 4Q, but remains below the long-term average of 45%. Meanwhile, performance dispersion increased within small caps in 4Q to above average, while it declined within mid caps and remained below average.

 


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