By Christine Idzelis
‘Beating the benchmark is very difficult,’ says Anu Ganti, head of U.S. index investment strategy at S&P Dow Jones Indices
A majority of active funds focused on U.S. large-cap stocks failed to beat the S&P 500 index last year, extending their track record of underperformance, according to S&P Dow Jones Indices.
Sixty percent of all active large-cap U.S. equity funds lagged the S&P 500 in 2023, a scorecard report from S&P Dow Jones Indices shows. The price of the S&P 500 climbed 24.2% last year for a total return of 26.3%, according to FactSet data.
The cost of investing in active funds is typically higher than in passive ones that simply track a widely-followed U.S. equities index such as the S&P 500. Investors may be willing to pay up for active funds in the hope that the managers who run them will deliver market-beating returns.
Yet a majority of large-cap U.S. equities funds have underperformed the S&P 500 SPX in each of the past 14 years, according to the report from S&P Dow Jones Indices.
“Beating the benchmark is very difficult – and especially difficult over time,” said Anu Ganti, head of U.S. index investment strategy at S&P Dow Jones Indices, in a phone interview.
The latest scorecard covers both active mutual funds and exchange-traded funds, which told a “very similar story across the board” with respect to their underperformance versus benchmarks, according to Ganti.
Actively managed large-cap U.S. equity funds largely struggled to beat the S&P 500 last year as surging gains from Big Tech stocks – including megacap companies Apple Inc. (AAPL), Microsoft Corp. (MSFT), Google parent Alphabet Inc. (GOOGL), Amazon.com Inc. (AMZN), Nvidia Corp. (NVDA), Tesla Inc. (TSLA) and Facebook parent Meta Platforms Inc. (META)- propelled the index to a large return.
The percentage of such funds underperforming in 2023 was only slightly less than the average annual rate of 64% over the 23-year history of scorecards tracked by S&P Dow Jones Indices.
Last year’s stock-market rally followed a tumultuous 2022, when actively managed large-cap U.S. stock funds fared better against the S&P 500 but still had a 51% rate of underperformance, according to the report.
Read: ‘Slim majority’ of actively-managed U.S. large-cap equity mutual funds fail to beat S&P 500 in 2022
The S&P 500 tumbled in 2022 as the Federal Reserve’s aggressive interest-rate hikes aimed at taming surging inflation rocked stock and bond markets.
S&P Dow Jones Indices found that in 2022 active large-cap U.S. equity funds had their best year attempting to beat the S&P 500 since 2009, when only 48% underperformed the index.
The S&P 500’s more than 19% drop in price in 2022 marked the index’s worst year since 2008, when markets were shocked by the global financial crisis. After the Fed cut rates to near zero in late 2008 to help revive the economy, the price of the S&P 500 rebounded in 2009 to soar more than 23%, FactSet data show.
Struggling long term
Looking more broadly across 22 equity categories, fund managers tended to struggle more to beat their benchmarks as time horizons lengthened, S&P Dow Jones Indices found.
Ganti said no category had a majority of active managers outperforming over a 15-year horizon.
But some categories of equity funds had more success over short-term periods, she said. A bright spot in 2023 was small-cap value, a category in which a majority of active equity fund managers outperformed the S&P SmallCap 600 Value index, according to the report.
Just 37% of funds in that category underperformed that benchmark last year, the report says, while 48% of all small-cap equity managers lagged the S&P SmallCap 600 index SML .
Meanwhile, in the more closely-watched category of U.S. large-cap stocks, the iShares Core S&P 500 ETF IVV and Vanguard S&P 500 ETF VOO have each gained 6.7% this year through Tuesday, FactSet data show. Both passive funds have an expense ratio of just 0.03%.
-Christine Idzelis
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03-06-24 1023ET
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