Actively Managed Funds Stage a Short-Term Comeback

More than half of actively managed U.S. equity funds beat their benchmark in the 12 months ended June 30, according to the latest SPIVA report

Actively managed funds staged a strong comeback in the 12 months ended June 30, with roughly 52% of all domestic equity funds outperforming the S&P Composite 1500 index.

That may not seem like much, but it’s more than three times the percentage of outperformers over the previous three, five, 10 and 15 years, according to the latest SPIVA (S&P Indices Versus Active) report from S&P Dow Jones Indices.

(Related: Active Funds Are Performing Better — for Now)

Two primary factors underpinned the improved performance of actively managed funds in the latest SPIVA report, according to authors Aye Soe and Ryan Poirier: managers matching or overweighting tech stocks, which have been the primary drivers of the stock market rally, and strong stock selection, especially in the first half of 2017, beyond tech. The trailing one-year performance through June 2017 also had the advantage of excluding the weak performance during the first half of 2016.

(Related: 2 Key Times to Invest in Actively Managed Funds)

“If information technology continues to play a big role in the market rally — it was the biggest driver of returns and biggest weight in the benchmark — and managers continue with that allocation, it’s possible that in the short run active managers will be keeping pace with their benchmark or perform better,” said Soe, managing director, global research & design at S&P Dow Jones Indices.

(Related: Advisors Sticking With Active Investments: Practical Perspectives)

But she cautioned that the latest performance numbers are merely a “12-month phenomenon,” and the majority of actively managed funds underperformed their respective benchmark index over 3, 5, 10 and 15 years. “This has happened before,” said Poirier, a senior analyst.

In the latest analysis, 50% or more of actively managed U.S. equity funds in five categories outperformed their respective indexes: large-cap growth, mid-cap growth, small-cap growth, multi-cap value and real estate. Large-cap growth funds led, with roughly 62% of funds in that category outperforming the S&P 500 Growth Index. The majority of small-cap international equity funds also bested their index.

Among actively managed fixed income funds, 50% or more in seven fund categories similarly outperformed: long- and short-term U.S. government funds; long, intermediate and short-term investment grade funds; global income funds; and emerging market debt funds.

Long-term investment grade and long-term government funds led the group, with over 95% and over 89%, respectively, beating their benchmark indexes.

The flattening yield curve, reflecting rising short-term rates and falling long-term yields, supported actively managed long-term bond funds, said Soe. She noted, however, that six months earlier those same categories “significantly underperformed. … I don’t see a consistent trend.”

High-yield and muni bond funds significantly underperformed in the 12 months ended June 30.

Despite the recent outperformance of several categories of actively managed funds, most funds underperform their passive counterparts and index benchmarks, according to the SPIVA scorecard for 3, 5, 10 and 15 years.

For that reason, the S&P Dow Jones analysts recommend that long-term investors focus on 10- and 15- year performance figures of funds as well as their longevity.

Large-cap value managers were the best performers over a 10-year horizon, with slightly more than 64% beating their benchmark. Muni bond funds were among those surviving the longest over 10 and 15 years.

Investors and advisors will have an even better idea of the relative performance of actively managed funds in 2017 when the next annual SPIVA scorecard is released in March, comparing the current year performance to previous years.

In the meantime if they’re interested in actively managed funds, they should “toss out all high cost funds and look for active fund managers who invest a significant amount of their own money alongside investors in their fund,” says Steve Deschenes, product management and analytics director at Capital Group. “These proven factors can add up to big differences in retirement savings over a lifetime.”

Capital Group is the parent company of American Funds, which has 13 funds included in Morningstar’s “Fantastic 43” funds list for 2017.

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