1. How has the recent performance of European active managers in fixed income compared to that in equity markets?
S&P Dow Jones Indices’ SPIVA® Scorecards have established themselves as a key resource for evaluating the performance of the active fund industry in relation to benchmark returns. Over the past 20 years, our reports, along with similar analyses conducted by others in academia and finance, and insights from real-world investor experiences, have contributed to a recognition that outperforming capitalization-weighted equity benchmarks, such as the S&P 500® and the S&P World Index, can be challenging, especially over the long term.
However, the bond markets present different characteristics. The widely used bond benchmarks may not be as well-known, and selecting an appropriate benchmark can be more nuanced. Additionally, bond index funds are in an earlier stage of development, and the active fixed income industry has faced different challenges compared to their equity counterparts. The empirical record for fixed income is also developing. Our SPIVA Scorecards did not include active European fixed income fund categories until 2022, when the merger of S&P Global and IHS Markit integrated the iBoxx range of bond indices into S&P DJI’s suite of benchmark offerings.
In the coming weeks, our SPIVA Year-End 2024 Scorecards will provide insights on active fixed income fund performance across various global markets, including 10 European fund categories with a sufficient sample size to yield representative statistics. The European results are already available, and, in relative terms, fixed income managers have achieved majority outperformance over the 2024 calendar year (see Exhibit 1).
However, the findings are not entirely positive; over periods longer than one year, we observed majority underperformance among active fixed income funds, increasing to nearly 80% over a 10-year horizon.
2. What do you think is driving those differentials and is there anything from the recent SPIVA results that you found surprising?
The challenges faced by stock-pickers in recent years are widely recognized. When the largest companies and, by some metrics, among the most expensive, experience a prolonged period of strong performance, it can be difficult for fund managers hunting for potentially undervalued minnows to keep pace with capitalization-weighted benchmarks. Conversely, it may be the bond markets have provided some opportunities for outperformance, particularly when evaluated retrospectively.
In comparison to the highly uncertain performance of smaller, cheaper stocks, the performance premium from the traditional sources of excess return in fixed income — taking credit, maturity or illiquidity risks, for example — are clearly advertised in the form of additional yields. At the end of 2023, there was not much promised to managers moving to longer-dated bonds: the German, U.S., and U.K. sovereign yield curves were inverted in places, while the yields at different maturity points in the broader investment grade euro universe — as measured by the iBoxx € Overall Index — were largely similar. Given the additional interest rate risk inherent in longer maturities, it might have seemed obvious to active managers that they should shorten their portfolio’s duration heading into 2024. Perhaps just as importantly and just as obviously, they were also offered a considerable yield enhancement from taking on greater credit risk.
