SUMMARY
- The U.S. equity market ended 2017 on a strong positive note, with the S&P 500® posting 21.83% over the 12-month period as of Dec. 31, 2017. The S&P MidCap 400® and S&P SmallCap 600® followed, reporting gains of 16.24% and 13.23%, respectively.
- During the one-year period, the percentage of managers outperforming their respective benchmarks noticeably increased in categories like Mid-Cap Growth and Small-Cap Growth Funds, compared to results from six months prior. Over the one-year period, 63.08% of large-cap managers, 44.41% of mid-cap managers, and 47.70% of small-cap managers underperformed the S&P 500, the S&P MidCap 400, and the S&P SmallCap 600, respectively.
- While results over the short term were favorable, the majority of active equity funds underperformed over the longer-term investment horizons. Over the five-year period, 84.23% of large-cap managers, 85.06% of mid-cap managers, and 91.17% of small-cap managers lagged their respective benchmarks.
- Similarly, over the 15-year investment horizon, 92.33% of large-cap managers, 94.81% of mid-cap managers, and 95.73% of small-cap managers failed to outperform on a relative basis.
- Over the 12-month period ending Dec. 31, 2017, growth managers across all three market cap ranges fared better than their core and value counterparts. The results highlight the cyclicality of style box investing, as core managers outperformed 12 months prior with the exception of small caps, while value managers outperformed core and growth 18 months prior.
- Across nine U.S. style categories, large-cap value managers was the best performing category over the10-year and 15-year horizons, with 29.56% and 14.29% of managers outperforming the benchmark, the S&P 500 Value.
- The headline international equity and emerging market equity indices began a strong rally in November 2016 that continued through 2017. Over the one-year period ending Dec. 31, 2017, the S&P/IFCI Composite posted 37.89%; the S&P Developed Ex-U.S. Small Cap, S&P International 700, and S&P Global 1200 reported 32.37%, 26.64%, and 23.84%, respectively, over the same period.
- During the one-year period, with the exception of actively managed international small-cap equity funds, the majority of managers investing in global, international, and emerging market funds underperformed their respective benchmarks.
- Over the 3-, 5-, 10-, and 15-year investment horizons, managers across all international equity categories underperformed their benchmarks. Furthermore, the longer the time horizon, in general, the more funds underperformed.
- The U.S. Federal Reserve increased rates three times during 2017. However, the 10-Year U.S. Treasury yield has not moved significantly off of its year-end 2016 levels, resulting in a flatter yield curve. During the one-year period ending Dec. 31, 2017, the majority of active fixed income managers investing in long-term government and corporate credit bonds underperformed their benchmarks, marking a shift from six months prior when they vastly outperformed.
- In contrast, funds investing in short- and intermediate-term government and credit bonds outperformed their benchmarks.
- Across all time periods studied, high-yield managers struggled to outperform their benchmark. During the one-year period, over 80.95% of actively managed high-yield bonds failed to deliver higher returns than the benchmark’s 7.50% return.
- The majority of municipal funds outperformed over the 12-month period, despite having mixed results over the three- and five-year investment horizons. However, over the 10- and 15-year periods, most muni funds underperformed their benchmarks. While these funds underperformed over the long term, it should be noted that municipal categories have some of the best survivorship statistics.
- Funds disappear at a meaningful rate. Over the 15-year period, 58% of domestic equity funds, 55% of international equity funds, and an average of 48% of all fixed income funds were merged or liquidated. This finding highlights the importance of addressing survivorship bias in mutual fund analysis.
