Global markets soared in the first half of 2017, largely due to the momentum gained from the November 2016 U.S. election results. The U.S. equity market posted strong gains across all cap ranges, with the S&P SmallCap 600® posting 22.47% over the 12-month period as of June 30, 2017. The S&P MidCap 400® and S&P 500® followed, reporting gains of 18.57% and 17.90%, respectively.
During the one-year period, the percentage of managers outperforming their respective benchmarks noticeably increased, compared to results from six months prior. Over the one-year period, 56.56% of large-cap managers, 60.69% of mid-cap managers, and 59.55% of small-cap managers underperformed the S&P 500, the S&P MidCap 400, and the S&P SmallCap 600, respectively.
We also see similar results between managers’ weighted fund returns and the benchmarks over the same period. The observation is consistent across all three market cap ranges. This is in contrast to six months prior when over 80% of funds underperformed and displayed large performance deviations from their cap-weighted benchmarks.
While results over the short term were positive, the figures are more in line with historical results when viewed over longer-term investment horizons. Over the five-year period, 82.38% of large-cap managers, 87.21% of mid-cap managers, and 93.83% of small-cap managers lagged their respective benchmarks.
Similarly, over the 15-year investment horizon, 93.18% of large-cap managers, 94.40% of mid-cap managers, and 94.43% of small-cap managers failed to outperform on a relative basis.
Over the 12-month period ending June 30, 2017, growth managers across all three market cap ranges fared better than their core and value counterparts. The results highlight the cyclicality of style managers, as core managers fared the best six months prior with the exception of small caps, while value managers outperformed both core and growth one year prior
Across nine U.S. style categories, large-cap value managers continued to perform the best over the 10-year horizon, with 35.75% of managers outperforming the benchmark, the S&P 500 Value.
The headline international equity and emerging market equity indices experienced a similar rally starting in November 2016 and continuing through the first half of 2017. Over the one-year period ending June 30, 2017, the headline international and emerging market indices posted strong double-digit returns.
During the same one-year period, with the exception of actively managed international small-cap equity funds, the majority of managers investing in global, international and emerging market funds underperformed their respective benchmarks.
Over the 3-, 5-, 10-, and 15-year investment horizons, managers across all international equity categories underperformed their benchmarks.
The U.S. Federal Reserve increased rates twice in during the first half of 2017. However, the 10- Year U.S. Treasury yield fell to 2.31%, resulting in a flatter yield curve. During the one-year period studied, the majority of active fixed income managers investing in government and corporate credit bonds substantially outperformed their benchmarks, with the exception of those investing in intermediate-term government bonds.
High-yield bond spreads have tightened considerably compared with Treasuries, and default rates remain low, reflecting the health of issuing companies. During the one-year period, high-yield managers struggled compared with their benchmarks, with over 83% of actively managed highyield bonds failing to deliver higher returns than the benchmark’s 12.70% return.
The majority of municipal funds underperformed over the 12-month period, despite promising results over the three- and five-year investment horizons. However, over the 10- and 15-year periods, most muni funds underperformed their benchmarks. While these funds underperformed over the long term, it should be noted that municipal categories have some of the best survivorship statistics.
Funds disappear at a meaningful rate. Over the 15-year period, more than 58% of domestic equity funds, 55% of international equity funds, and approximately 47% of all fixed income funds were merged or liquidated. This finding highlights the importance of addressing survivorship bias in mutual fund analysis.