Predicting the “death of active management” is about as tired a proclamation as calling any year “a stock picker’s market.” Despite predictions of both, there are still almost 10,000 hedge funds globally and active managers on average continue to underperform the broader stock market.
To that last point, S&P Dow Jones Indices released their latest SPIVA report card recently, which shows how active managers performed versus their broad stock market benchmarks. “Over the 15-year period ending Dec. 2016, 92.15% of large-cap, 95.4% of mid-cap, and 93.21% of small-cap managers trailed their respective benchmarks," the report’s authors write.
Clearly, the industry has some performance issues. Instead of getting hot and bothered about it, carefully pick your spots. Hedgeye Financials analyst Jonathan Casteleyn hosted an institutional conference call on Invesco (IVZ), the Atlanta-based fund manager with $834 billion in assets under management.
“What’s happening in the S&P 500 is the correlations are starting to break down, which means the dispersion of returns is widening,” Casteleyn says. “This allows for active asset managers to pick apart that dispersion and create performance.”
Casteleyn shows a chart of the average 65-day correlation of an S&P 500 index member to the index itself. This correlation study just hit the lowest level since 2001. The chart also shows the performance of the 1,928 hedge funds within the Barclays Hedge Index, as a proxy for all active managers. “Basically when correlations break down, active manager performance goes up,” Casteleyn says. “If performance ticks up for Invesco and the rest of the group, we should start to see flows follow.”