Staying top quartile – it’s nearly impossible for US equity managers

Added 15th January 2016

US equity funds have a hard time in beating their peers on a sustained basis. Only 4.28% of 678 US equity funds analysed by S&P managed to consistently finish in the top-quartile during three consecutive one-year periods from September 2012 to September 2015. So no wonder investors prefer the passive option.

Staying top quartile – it’s nearly impossible for US equity managers

Large cap funds have the worst record in maintaining top-quartile performance. A mere 1.19% of the 252 large cap funds S&P analysed managed to finish in the top-quartile each time during the three-year period. A lot more funds naturally managed to maintain a top-half ranking over the same timeframe, but this still amounted to only one in five funds in the large cap space. Small cap funds fared only slightly better with a score of 25%.

The graph below shows that the difficulty fund managers have to stay in the top-quartile is not due to the stiff competition they face from other managers. Rather on the contrary: active managers as a whole have been consistently underperforming index trackers, by a margin that’s surprisingly high over a 4-year period, and which is growing steadily.



An active retreat

So how have these telling numbers impacted fund flows into US equities during the research period? Fund selectors across Europe keep telling us they have a hard time finding active managers in the US equity space that they believe can consistently outperform their index. Consequently, they say, most or all of their clients’ money is invested in passive vehicles in this asset class.

"Large cap funds have the worst record in maintaining top-quartile performance."

A look at Morningstar’s fund flows data shows that they have indeed been doing so. While active funds received the benefit of doubt until mid-2014, since then investors have been switching from active to passive investing. From June 2014 until September 2015, they withdrew a net €11.4bn from active US equity funds, while adding net €6.4bn to their ETF holdings.











So active US equity funds are obviously stuck between a rock and a hard place. Of course there remain exceptions, but in general they are in bad shape, and bleeding. In the coming weeks we will follow S&P’s example by taking a closer look at the shape of active management in other asset classes. Stay tuned! 

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About Author

Tjibbe Hoekstra

Senior Reporter

Tjibbe joined Expert Investor as a senior reporter in March 2014. Before moving to London he worked as a financial news reporter for various news outlets in Amsterdam, including Reuters and ANP, the main news agency in the Netherlands. He also worked for Fondsnieuws, a website and magazine for finance professionals in the Netherlands. Tjibbe holds a MSc in Public Administration and a post-graduate diploma in Journalism.


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