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Active managers struggle to beat benchmarks as volatility struck in '18

The stock market's recent gyrations may have proven to be too wild for many U.S. active fund managers.

With 68.83% of domestic equity funds trailing the S&P Composite 1500 in 2018, U.S. equity fund managers suffered their fourth-worst year since 2001, according to the S&P Dow Jones Indices SPIVA U.S. Scorecard. That underperformance came amid dramatic price swings in the U.S. stock market, which active managers have long proclaimed is a missing tailwind for their businesses because of their ability to limit their clients' exposures to market volatility.

Still, both large- and small-cap equity fund managers struggled to beat out their respective benchmark indexes in 2018. About 65% of large-cap funds underperformed the S&P 500 in 2018, marking the ninth straight year that large-cap managers have trailed the index. About 68.5% of small-cap funds lagged behind the S&P SmallCap 600 throughout 2018, according to the report.

Investors seem to have noticed active managers' lagging performances in 2018, as U.S. active equity funds saw $175.23 billion in net outflows during 2018, according to data from Morningstar Direct. Nearly 40% of those withdrawals came in the final three months of the year, which were the most volatile of 2018. By comparison, investors funneled $206.46 billion into U.S. passive equity funds in 2018. Industry experts have pointed to active managers' diminished returns and higher prices as leading reasons why investors continue to pile into passively managed products such as exchange-traded funds.

Active managers have struggled to outperform their benchmark indexes for several years now.

Over a long-term investment horizon such as 10 to 15 years, at least 80% of equity active fund managers across all categories failed to beat their respective benchmarks, according to the report.

U.S. large-cap value funds did provide a "bright spot" for active management in 2018, though, as about 54% of the managers in the category outperformed the S&P 500 Value index, according to the SPIVA report. The majority of domestic mid-cap funds also beat out the S&P MidCap 400 index for the second year in a row. Mid-cap growth funds particularly helped buoy the category with 84.8% of the managers beating out the S&P MidCap 400 Growth index.

Yet, most small- and large-cap growth managers struggled to outperform their respective benchmarks in 2018, despite strong performance throughout the first three quarters of the year, the SPIVA report said.