Global equity markets powered ahead in 2021, despite the ongoing COVID-19 pandemic. As rocky vaccine rollouts and new coronavirus variants prolonged the pandemic, governments and central banks continued their strategies of generous fiscal spending and loose monetary policy. The S&P 500® gained 28.7% in 2021, capping an impressive 100.4% cumulative advance over the past three years.
The positive market performance translated into good absolute returns for active fund managers, although relative performance continued to disappoint: 79.6% of domestic equity funds lagged the S&P Composite 1500® in 2021.
In 16 of the 18 categories tracking U.S. equities-focused funds, more than half the funds underperformed their benchmark. Particularly noteworthy were the 98.6% of large-cap growth funds that failed to beat the S&P 500 Growth—not only the worst-performing category in 2021, but the worst performing of any U.S. equities category in the past 21 years.
Large-cap funds continued their underperformance for the 12th consecutive calendar year, as 85% of active large-cap funds trailed the S&P 500. Mid-cap (62%) and small-cap (71%) funds acquitted themselves slightly better relative to the S&P MidCap 400® and S&P SmallCap 600®, but still offered scant reason to celebrate.
Fund managers often respond to evidence of active underperformance by claiming to offer better returns per unit of volatility (i.e., to outperform in risk-adjusted terms). This would be an appropriate counterargument, if only it were true. However, the data shows that the vast majority of actively managed funds underperformed on this metric as well. Among domestic equity funds, while 90% have underperformed the S&P Composite 1500 over the past 20 years, an even greater 95% did so on a risk-adjusted basis.
For internationally focused U.S. funds, relative results in 2021 were a mixed bag. Most global (84%) and emerging markets (65%) funds failed to top the S&P Global 1200 and S&P/IFCI Composite, respectively. Investors in international (50%) and international small-cap (31%) funds were less likely to fall short of the S&P International 700 and S&P Developed Ex-U.S. SmallCap, respectively. Taking a longer view, however, nearly 85-90% trailed their benchmarks over the past 20 years, similar to their domestic counterparts.
While equity markets whistled past the inflation graveyard, the fixed income world started to price in the end of the easy money party. The Bloomberg Barclays US Government (1-3 Year), Intermediate, and Long indices returned -0.60% -1.69%, and -4.57% for the year, respectively. The funds charged with beating these benchmarks reflected this non-parallel movement in the rates term structure: government short funds had little chance (26%) of beating their hurdle rate, but intermediate (52%) and long (82%) funds took greater advantage of the lower bars they needed to clear.
Echoing the results from equities, longer observation horizons offered little sanctuary. More than 60% of funds did not surpass their benchmarks across all fixed income categories over the 15-year horizon on both an absolute and risk-adjusted basis.
The SPIVA Scorecard's accounting for survivorship bias continues to be a valuable cautionary tale. As has generally been the case in recent years, roughly 5% of funds across asset classes and categories were merged or liquidated in 2021. Over 20 years, nearly 70% of domestic equity funds and two-thirds of internationally focused equity funds across segments were confined to the history books. Similarly, roughly half of fixed income funds closed their doors over the past 15 years.