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April 23rd, 2020
By Scott Treacy, CFA
In the first quarter of 2020, the MSCI AC World index was down 21.3%. We have to go back to the fourth quarter of 2008, the heart of the US subprime mortgage crisis, to find as significant of a drawdown over a quarter (-22.3%). Since 2008, investors have only experienced 3 calendar-year periods when the MSCI AC World index produced negative returns: 2011, 2015, and 2018. That means in 8 of those calendar-year periods, or 73% of the time, investors experienced positive returns. Additionally, in 6 of those calendar-year periods, the positive returns were in the double digits. Investors are used to public equity markets going up, so with this sudden and drastic market drawdown, there is much trepidation. Investors were also getting used to markets going up and, as a result, turned to passive strategies in order to lower their fees. Unfortunately, for those investors that went passive, we found many active managers outperforming their respective indices, and some by a substantial margin.
Before we present our analysis of active manager performance, it is important to note that these figures are preliminary and are based on data submitted to the Investment Metrics global database (the data is as of April 15th, 2020). We reviewed the global large-cap, international large-cap, emerging markets, US large-cap growth, US large-cap value, and US large-cap core peer group universes. Included in the analysis are those portfolios with at least $250M in tax-exempt assets and those strategies that have updated their strategy assets in our database. The samples include 130 products in global large-cap equity, 141 products in international large-cap equity, 85 products in emerging markets equity, 69 products in US large-cap growth equity, 91 products in US large-cap value equity, and 48 products in US large-cap core equity.
Five of the six universes reviewed had more than half of the active managers outperforming their respective benchmarks in Q1 2020. The benchmarks used to evaluate outperformance were the MSCI AC World index, MSCI EAFE index, MSCI EM index, Russell 1000 Growth index, Russell 1000 Value index, and the Russell 1000 index. The area of the public equity markets where active management was most impressive was in global large-cap equity, where 60% of active managers outperformed. At the high end, the best-performing active managers in global equity had a -1% return over the quarter compared to the index being down 22%. This provides an active return of over 20% for the quarter. Conversely, we only found 39% of active emerging markets equity managers outperforming their index. Clearly, there were some active managers in this volatile market that truly earned their management fee in terms of protecting assets.
The segments of the active public equity market that performed best overall were the US large-cap growth peer group and the global large-cap equity peer group. The best-performing products came out of the global equity peer group, with products returning -1% and -3% over the quarter. The active managers in the US large-cap value peer group had the worst overall returns, both at the median and average levels. The worst-performing product in this peer group had a return of -41%. Unfortunately, value managers and quantitative managers struggled with performance over the quarter. The best-performing sectors over the quarter were healthcare stocks and information technology (IT) stocks. Growth managers typically have a substantial weighting to the IT sector and value managers do not, due to the lofty valuations from many of these stocks. The worst-performing sectors were energy stocks and financials. These are sectors that many value managers have a substantial weighting and, as a result, dragged down their Q1 return.
Many of the top-performing portfolios over the quarter tended to be fundamental quality growth investment managers. Some asset managers have multiple products in the top five performing portfolios lists (Baillie Gifford, Morgan Stanley, and GQG). Additionally, those top managers over the quarter also had very good 1-year performance figures as well.
In closing, there were many active managers that were able to demonstrate their stock selection capabilities during this drastic downturn. Many top-performing portfolios in the quarter offer eye-popping active returns of over 10%. This erratic market has provided good active managers with a solid argument for charging higher active management fees because of their stock selection capabilities and their ability to outperform peers.
To learn more about our data and research, contact the Investment Metrics Research Team.
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