SUMMARY
2018 was a rollercoaster ride for financial markets: after trade tensions weighed on investors’ sentiment in Q1, strong corporate earnings and a rosy U.S. economic outlook initially drove a recovery, before uncertainty over global economic growth and future Fed policy wiped off YTD gains for many equity benchmarks in Q4.
The S&P 500®; (-4.38%) finished 2018 with its first calendar-year loss in a decade, while the S&P MidCap 400® (-11.08%) and the S&P SmallCap 600® (-8.48%) also fell.
Amid the market volatility, 2018 was the fourth-worst year for U.S. equity managers since 2001; 68.83% of domestic equity funds lagged the S&P Composite 1500® during the one-year period ending Dec. 31, 2018.
For the ninth consecutive year, the majority (64.49%) of large-cap funds underperformed the S&P 500. The figures highlight that heightened market volatility does not necessarily result in better relative performance for active investing.
Similarly, small-cap equity managers found it more challenging to navigate 2018’s market environment compared with 2017’s rangebound market movements; 68.45% of all small-cap funds lagged the S&P SmallCap 600 over the one-year horizon. Underperformance was particularly noticeable in the small-cap value (83.33%) and small-cap core (87.55%) categories.
Growth style investing dominated through the third quarter of 2018, before succumbing to the market turbulence observed after September. However, most domestic large- and small-cap growth managers lagged their respective benchmarks in 2018. In fact, compared with results from 12 months prior, we saw 27.35 and 46.37 percentage point increases in the proportion of funds lagging the S&P 500 Growthand S&P SmallCap 600 Growth, respectively.
U.S. large-cap value offered a bright spot for active management in 2018; roughly 54% of the managers in the category beat the S&P 500 Value
.For the second consecutive year, most domestic mid-cap funds outperformed the S&P MidCap 400. The impressive performance of mid-cap growth funds helped; 84.80% of managers beat the S&P MidCap 400 Growth, which in turn outperformed the S&P MidCap 400 in 2018.
Over the long-term investment horizon, such as 10 or 15 years, 80% or more of active managers across all categories underperformed their respective benchmarks.
It was a challenging year for global equities as all but 2 of the S&P Global BMI’s 48 country constituents declined (in USD terms). International and emerging market funds generally struggled to navigate the headwinds; 76.84% of international funds lagged the S&P 700, while the majority of emerging market managers failed to beat the S&P/IFCI Composite.
International small-cap funds had difficulty outperforming the benchmark in 2018; 65.52% of the category’s funds lagged the 18.41% plunge of the S&P Developed Ex-U.S. SmallCap.
Uncertainty over future Federal Reserve policy offered headwinds for fixed income managers at the shorter end of the curve. The vast majority of government short funds, and all of their intermediate counterparts, lagged in 2018. Similar results were recorded by the investment-grade short and intermediate categories.
In contrast, the long-end of the curve fared much better; a thumping 83.02% of government long funds and 90.91% of investment-grade long funds outperformed over the one-year horizon. But in signs that recent out-performance is no guarantee of future results, over 90% of both categories lagged over the three-year period.
Elsewhere, the majority of high-yield managers, municipal bond funds, leveraged loan funds, and MBS funds underperformed their benchmarks in 2018.
While there were some differences in relative performance figures compared with prior reports, the longer-term 15-year figures show that most active fixed income managers underperformed their benchmarks.
The disappearance of funds remains meaningful; 57% of domestic equity funds, 49% of international equity funds, and 52% of all fixed income funds were merged or liquidated over the 15-year horizon. This highlights the need to correct for survivorship bias.
