After a barren decade dominated by bubbly technology stocks, feckless money printing, yada yada, last year was an unusually fertile environment for US stockpickers. Right? Right?

It’s true that dispersion between S&P 500 stocks hit the highest level since 2009 last year. Hello alpha opportunities!

Bigger stocks underperformed smaller ones, and most S&P 500 constituents actually outperformed the index — almost a third beat it by more than 20 per cent. Basically, if you threw darts at a table of US stocks, chances were you’d outperform.

And yet . . . 

These charts are from S&P’s big fat asset-weighted survivorship-bias-corrected annual round-up of how active investment funds fare against their benchmarks, published Tuesday.

One could choose to spin this as 2022 being the best year for active US equity fund managers in more than a decade, with almost half managing to outperform the stock market. You could even bolster the case by highlighting how a majority of small-cap funds bested their benchmarks (if you ignore an absolutely shocking year for small-cap growth managers).

Or you could just gesture at the long-term performance data — less than 7 per cent of US active equity funds have beat the market over the past decade — and realise that the vagaries of year-to-year results don’t alter the fundamental issues with active management.

Even if active managers had managed to notch up a great market-beating year (on average) it wouldn’t have changed this. But given how many people have banged on about how active management would ‘prove its worth’ when central banks ‘stopped printing money’ and ‘suppressing volatility’ etc etc, it is pretty telling.

Weighted by assets, the average US stockpicker lost 21 per cent last year, compared to the broad S&P Composite 1500’s 18-per-cent decline. For small-cap funds it was a 21-per-cent asset-weighted loss, compared to a 16-per-cent decline for S&P’s small-cap index.

It was a similar picture internationally, with the average global fund losing 22 per cent, compared to the market’s 17-per-cent fall. All in what was supposed to be an improved environment for active management.

Bond funds, which ostensibly have an easier time outperforming in general (and certainly had choppy markets to prove their worth), also mostly stank up the place. As Morningstar said its own active-vs-passive report late last month:

Brutal market performance in 2022 reignited the narrative that active funds can better navigate market turmoil than passive peers. Despite an uptick in success rates by US stock-pickers, the latest evidence debunks these claims yet again. As Warren Buffett once said, “only when the tide goes out do you discover who’s been swimming naked.” In 2022, it turned out that active bond and real estate funds were caught skinny-dipping.

This is not because active managers are lazy or dumb. It is because they are increasingly smart and hard-working that markets are so hard to consistently beat. At the same time, the distributional skew in equity market returns is incredible. The main problem is that high fees are a high hurdle to clear.

However, there is naught as resistant to data as predictions that NEXT YEAR will be the one where active management finally stages its comeback.

Further reading:

How passive are markets, actually?

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