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December 9th, 2011 by

Underperformance Rife Among Active Fund Managers By Chris Flood Writing for the FT

Almost three-quarters of actively managed US large-cap funds failed to outperform the S&P 500 over the past three years, according to an analysis by Standard & Poor’s.

S&P has constructed a scorecard that summarizes the performance of active managers in different categories across one, three and five years compared with a relevant benchmark. The study calculated average returns for each fund group weighted by the size of each fund constituent. It is also corrected for survivorship bias to take into account funds that were liquidated or merged during the study period. t

The study shows that underperformance by active managers is widespread.

“Indices have outperformed the majority of active managers in nearly all major domestic and international equity categories,” said Frank Luo, senior director for S&P indices global research and design.

More than four-fifths (80.8 per cent) of active managers in emerging markets also failed to beat a broad benchmark for emerging markets equities over the past three years. Over the past five years, the performance of active managers in emerging market equities was even worse, with 87 per cent failing to beat the S&P/IFCI composite index.

“A large percentage of international small-cap funds, on the other hand, continue to outperform benchmarks, suggesting that active management opportunities are still present in this space,” said Mr Luo.

Over the past three years, 30.9 per cent of active managers in international small-cap funds failed to outperform the S&P World (ex-US) small cap index, dropping to 23.9 per cent over five years.

A similar pattern of underperformance by active managers was reported across fixed income funds.

S&P found that 77.8 per cent of active managers in US government long-maturity funds failed to beat the benchmark over three years while 69.7 per cent of active managers in long-dated corporate debt also underperformed.

Active managers did a particularly poor job in high yield bonds markets where 92 per cent failed to outperform over three years. There was an almost equally disappointing performance for active managers in the US municipal bond market where 85.7 per cent failed to outperform a broad benchmark (the S&P National AMT-Free municipal bond index) for this $3,000bn market.

Active managers also appear to be finding it tougher to outperform in emerging market debt, which is often seen as a potentially more fertile area for active strategies due to the wide diversity of bonds on offer.

Over the past three years 57.1 per cent of managers failed to beat the benchmark compared with 33.3 per cent over the last five years.

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