SUMMARY
- Despite the market turmoil seen in the first quarter of 2018, the U.S. equity market posted positive returns over the 12-month period ending June 30, 2018, with small-cap stocks leading the pack. The S&P SmallCap 600® reported 20.50%, while the S&P 500® and the S&P MidCap 400® posted 14.37% and 13.50%, respectively.
- During the one-year period ending June 30, 2018, the overall percentage of all domestic funds outperforming the S&P Composite 1500® increased (42.02%) compared with six months prior (36.57%).
- Over the one-year period, 63.46% of large-cap managers, 54.18% of mid-cap managers, and 72.88% of small-cap managers underperformed the S&P 500, the S&P MidCap 400, and the S&P SmallCap 600, respectively.
- Despite small-cap equity performing the best, more small-cap managers underperformed the S&P SmallCap 600 over the one-year period compared with results from six months prior.
- Overall performance of active equity funds relative to their respective benchmarks over the medium term also improved, although the majority still underperformed their benchmarks. Over the five-year period, 76.49% of large-cap managers, 81.74% of mid-cap managers, and 92.90% of small-cap managers lagged their respective benchmarks.
- Similarly, over the 15-year investment horizon, 92.43% of large-cap managers, 95.13% of mid-cap managers, and 97.70% of small-cap managers failed to outperform on a relative basis.
- Growth style investing dominates, as growth managers across all three market cap ranges performed better than their core and value counterparts over the one-year period. Only 36.29%, 31.54%, and 42.05% of large-cap, mid-cap, and small-cap growth managers, respectively, underperformed their style-adjusted benchmarks. However, more growth funds underperformed their respective benchmarks compared with six months prior.
- Over the long-term investment horizon, as measured by the 15-year period, relative underperformance of growth and value funds compared with their respective benchmarks did not differ significantly, indicating the cyclicality of style box investing. Across nine U.S. style categories, large-cap value was the best-performing category over the 10- and 15-year horizons, with 23.79% and 16.95% of managers outperforming the benchmark, the S&P 500 Value.
- The headline international equity and emerging market equity indices remained positive in the 12- month period ending June 30, 2018. The S&P Global 1200 posted 11.57%, while the S&P Developed Ex-U.S. Small Cap, S&P/IFCI Composite and S&P 700 reported 11.43%, 8.80%, and 7.82%, respectively, over the same period.
- Over the 1-, 3-, 5-, 10-, and 15-year investment horizons, managers across all international equity categories underperformed their benchmarks. Furthermore, the longer the time horizon, in general, the more funds underperformed. Compared with six months prior, more managers underperformed their benchmarks in the one-year investment horizon, especially in the international small-cap category.
- The 10-Year U.S. Treasury yield curve remained flat. During the one-year period ending June 30, 2018, the majority of active fixed income managers investing in long-term government and longterm investment-grade bonds underperformed their benchmarks, but their relative performance over their benchmarks improved compared with six months prior. In contrast, funds investing in short- and intermediate-term investment-grade bonds outperformed their benchmarks.
- Within the emerging market debt funds, 88.14% underperformed the benchmark in the one-year period, compared with 22.58% underperforming six months prior.
- The majority of municipal funds outperformed over the 12-month period, despite having mixed 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, 58.58% of domestic equity funds, 53.66% of international equity funds, and an average of 52.16% of all fixed income funds were merged or liquidated. This finding highlights the importance of addressing survivorship bias in mutual fund analysis.
