Active Managers Underperform in 2023

Hold the confetti cannon: Active managers once again underperformed the broader market in 2023.

Passive vs. Active Report Findings

Just 40% of all mutual and active exchange-traded funds in the closely watched U.S. large-capitalization stock category beat the S&P 500 index last year, according to the latest S&P Dow Jones Indices passive vs. active report—better known as SPIVA.

14th Consecutive Year of Underperformance

Influence of Top Performers

Alphabet, Amazon.com, Apple, Meta Platforms, Microsoft, Nvidia, and Tesla—the Magnificent Seven—played a huge role in driving the index's gains of 26%, each with returns of 49% or more in 2023.

Impact of Market Concentration

The more concentrated the market is, the harder it becomes for active investors to outperform. S&P highlighted that owning high-performing stocks was key to generating excess returns.

Long-Term Performance Trends

Over the past 23 years, the annual average underperformance rate for active managers has been 64%. However, in 2023, despite the continued lag, the 40% performance was considered relatively better than expected.

Looking Ahead

S&P DJI noted that while 2022 saw a slight improvement in large-cap active equity performance, 2023 presented a different story with the exceptional performance of the Megnificent Seven.

Stock Market Performance Analysis

In 2023, the S&P 500 Top 50 experienced a significant surge of 38%, surpassing both the S&P 500 and the S&P 500 Equal Weight Index. Despite this remarkable performance, a notable percentage of large-cap funds managed to outperform the S&P 500.

Large-Cap Funds Outperformance

The report indicated that 40% of all large-cap funds and 27% of large-cap core funds were able to outperform the S&P 500. This finding was unexpected given the strong performance of the largest stocks, which active managers often underweight relative to their benchmark weights.

Small-Cap Success

The analysis revealed that funds in smaller-capitalization U.S. stock categories generally performed better, potentially due to their ability to strategically tilt towards outperforming large caps.

International Equities Evaluation

In the realm of international equities, 74% of actively managed funds failed to beat the S&P Global 1200 index. However, international small-cap funds showed a somewhat improved performance, with only 54% falling behind the S&P Developed Ex-U. S. Small Cap index.

Fixed-Income Fund Comparison

The report highlighted mixed outcomes among actively managed bond funds. While 59% of funds across different categories underperformed their benchmarks, there were extremes within fixed-income investments.

Municipal Debt and Emerging Markets

Notably, general municipal debt and emerging market debt funds emerged as two categories where a majority of managers surpassed their benchmarks, with 61% and 71% of funds, respectively, beating expectations.

This comprehensive analysis provides valuable insights into various market segments and performance trends.