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Active managers are suffering a perilous pandemic

[LONDON] The failure of equity fund managers to deliver outsize returns commensurate with the fees they charge for their stock-picking services continues to be a source of ammunition for advocates of lower-cost index tracking products. Less scrutinised, although equally dreadful, is the seeming inability of their bond brethren to offer a fixed-income alternative that can generate benchmark-beating performance.

Hence the existential crisis that still threatens the entire active fund management industry. The pandemic, it seems, hasn't changed anything, according to S&P Global's (S&P) Dow Jones Indices Unit's just released update on how the active crowd is doing compared with the benchmarks against which its performance is measured - or, perhaps more accurately, against the index-tracking funds that investors can buy to gain market exposure at a lower cost. Overall, it's not a pretty picture.

In the first half of the year, fewer than a third of US domestic equity fund managers delivered annualised returns that outpaced the S&P Composite 1500 Index. While that's their best - or least-bad - performance compared with longer periods, it still destroys the argument that stock pickers can outperform in volatile markets. It means even amid the pandemic-inspired swings seen in equity prices in recent months, two-thirds were still unable to beat the index.

The fixed-income crowd has done even worse. Less than 10 per cent of active bond portfolio managers outstripped their relevant benchmarks in most debt categories, according to the data compiled by S&P. Even in high-yield securities, the index managed to beat two-thirds of bond managers.

And that's just measured over a one-year period. Extend the analysis over a longer horizon, and the paucity of performance becomes even more apparent.

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Those figures for emerging market debt funds are not an error. Precisely none, nada, zero of portfolios focused on emerging markets managed to outpace the relevant Bloomberg Barclays index on a 10 or 15-year basis, the S&P report says. On that longer-term view, fewer than 3 per cent of bond managers in any of the debt categories outperformed their index. For shame.

I wrote in March that fund managers who'd explained away their lacklustre performance as the result of relentlessly one-way stock indices had a final opportunity to prove their worth, and earn their fees, as volatility returned with a vengeance. After this year's dismal outcome, no one would blame an investor for calling last orders in the last-chance saloon for active management.

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