by Detlef Glow.
The year 2022 was one like no other. The war in the Ukraine, increasing inflation rates and the respective quantitative tightening programs from central banks around the globe, the still ongoing effects from the COVID-19 pandemic on supply chains, and geopolitical tensions between China and Taiwan, as well as between China and the U.S., have all on their own the potential to drive markets. Given the fact that these factors appeared at the same time, it is not surprising that equity markets around the world entered a bear market environment in 2022.
With this in mind, 2022 had the potential to become a year in which active asset managers had the chance to deliver a high value added compared to passive strategies by using cash as a risk buffer in times of market turmoil and investing in low beta stocks during a downswing of the market.
In general, active fund managers of equities funds did not achieve this goal over the course of 2022, as 62.76% of the funds underperformed their fund manager benchmarks. Nevertheless, we observed greater resilience to losses among funds that followed a conventional investment strategy over this time period.
The analyzed fund universe has been derived from all mutual funds and ETFs listed in the Lipper database, with the asset type equity assigned. From this universe we excluded all passive products, as well as all convenience share classes, and all leveraged products. We also excluded all funds launched after December 31, 2021, as there is no complete performance history for these products for the analyzed time period.
Passive funds were excluded from this comparison, as the aim of the analysis is to show whether actively managed funds in general, and ESG-related products in particular, were able to add value compared to their fund manager benchmark over the course of 2022. In this regard, the inclusion of passive products would have skewed the results, since the expected return of a passive product is the return of the index minus the total expense ratio of the respective fund.
These measures brought the available fund universe to 23,551 products.
We used the fund manager benchmark and, in a second analysis, the technical indicator as reference to calculate the relative performance of the respective actively managed funds between January 1, 2022, and December 31, 2022. A closer look at the number of funds in each analysis shows that it is worth conducting a second analysis, as a large number of funds do not disclose their benchmarks or use a benchmark that is not available in the Lipper database. Since the analysis includes funds from all parts of the world, the base currency for all calculations is the U.S. dollar.
Since not all funds have or disclose a benchmark, Lipper has assigned standard market benchmarks as technical indicators for all Lipper Global Classifications which allow relative calculations to be performed even when the fund manager benchmark is missing. One example of this is the Lipper Global Classification (LGC) Equity Global where we assigned the MSCI Global TR USD as technical indicator for all funds. Although a technical indicator is quite helpful for the analysis of a complete peer group, it has some flaws, as the respective benchmark may not represent all restrictions applied on the fund level. This is especially true with regard to ESG/SRI funds since a standard market benchmark does not take any ESG/SRI criteria into consideration and may have, therefore, a deviant asset allocation at the country and sector level compared to the respective fund.
Results: Relative Performance of Actively Managed Funds vs Their Fund Manager Benchmarks
A look at the overall results of the relative performance of the 13,520 actively managed funds (conventional and ESG-related) versus their fund manager benchmarks shows that active managers were not able to add value for investors, since 5,035 funds (37.27%) delivered an outperformance, while 8,485 (62.76%) were underperforming their respective fund manager benchmarks.
Graph 1: Percentage of Outperforming and Underperforming Funds (Relative Performance vs Fund Manager Benchmark)
Source: Refinitiv Lipper
In more detail, 3,729 (40.35%) conventional funds beat their respective fund manager benchmarks, while 5,513 (59.65%) showed an underperformance over the course of the year 2022. The misery of actively managed products gets even clearer in the segment of ESG-related funds where 30.53% (1,306) of the available products showed an outperformance, while 69.47% (2,972) of funds showed an underperformance compared to their respective fund manager benchmarks.
Graph 2: Percentage of Outperforming and Underperforming Funds (Relative Performance vs Fund Manager Benchmarks) by Management Approach
Source: Refinitiv Lipper
To evaluate the success of actively managed funds, it is not enough to count the funds which have outperformed or underperformed their respective fund manager benchmarks. It is also important to analyze at which margin. The overall average outperformance of conventional funds between January 1, 2022, and December 31, 2022, was 5.9%. ESG-related products showed an on average lower overall outperformance of 5.15%. A closer look at the performance pattern shows that ESG-related products showed a lower average underperformance (-7.11%) compared to their conventional peers (-7.33%). Nevertheless, conventional funds showed a lower overall underperformance (-1.01%) relative to their fund manager benchmarks than ESG-related products (-2.14%).
Graph 3: Average Outperformance and Underperformance of Actively Managed Funds (Relative Performance vs Fund Manager Benchmark) by Management Approach
Source: Refinitiv Lipper
These results may indicate that actively managed conventional funds are able to deliver better results than their ESG-related peers as they showed a higher percentage of outperforming funds, a better average outperformance, and a lower overall underperformance over the course of 2022.
Nevertheless, these results are disappointing from an investor point of view since the majority of products from both categories were not able to achieve an outperformance compared to their fund manager benchmarks.
Results: Relative Performance of Actively Managed Funds Versus Their Technical Indicators
The usage of the technical indicator led to a larger universe of funds for this analysis. But even as the fund universe grew by nearly 10,000 products, we witnessed somewhat the same results for the relative performance of actively managed equity funds versus their technical indicators, since only 7,545 products (32.24%) were able to outperform their technical indicators. Meanwhile, 15,860 products (67.76%) showed an underperformance.
Graph 4: Percentage of Outperforming and Underperforming Funds (Relative Performance vs Technical Indicator)
Source: Refinitiv Lipper
A closer look at the details shows that the underlying pattern of the ratio between outperforming and underperforming funds relative to their technical indicators is different. The percentage of conventional (10,863 or 64.99%) and ESG-related (4,997 or 74.69%) funds which showed an underperformance compared to the technical indicator of their respective classification is much higher than compared to the fund manager benchmark. This means in turn that a lower percentage of conventional (5,852, or 35.01%) and ESG-related (1,693 or 25,31%) funds, showed an outperformance relative to the technical indicators.
Graph 5: Percentage of Outperforming and Underperforming Funds (Relative Performance vs Technical Indicator) by Management Approach
Source: Refinitiv Lipper
As far as the relative performance is concerned, it is not enough to count the number of out- and underperforming funds. To evaluate the success of the funds, one needs to evaluate the level of out- and underperformance of the funds versus their technical indicators. In general, it can be said that the gap between the highest outperformance and largest underperformance has widened as the universe of analyzed funds has increased. This increase might be caused by the fact that the technical indicator is not always a suitable benchmark for performance comparisons, as it may not represent the eligible investment universe of specific funds. This is especially true for ESG-related products.
The overall average outperformance of conventional funds between January 1, 2022, and December 31, 2022, was 6.6%. ESG-related funds showed on average a lower overall outperformance of 6.00%. The pattern repeats itself on the other side of the table, since conventional funds (-8.70%) showed a lower underperformance than their ESG-related peers (-9.05%).
Graph 6: Average Outperformance and Underperformance of Actively Managed Funds (Relative Performance vs Technical Indicator) by Management Approach
Source: Refinitiv Lipper
Although the relative performance of actively managed funds versus their technical indicators differs somewhat from results shown relative to their fund manager benchmarks, the overall pattern is somewhat similar.
Therefore, it can be concluded that actively managed funds were on average not able to deliver a value added over the course of 2022.
Within the market environment of 2022 it was not surprising to see that ESG-related funds showed a weaker performance pattern than their conventional peers, as the fund managers could not offset the increasing prices for fossil energy which fostered the performance of so-called “old economy” companies. In addition to this, technology companies, the darlings of ESG-related investors, lost a lot of value over the course of 2022, since the earnings of many of those companies could not catch up with the growth expectations of the analysts and investors.
Given the exceptional market circumstances over the course of 2022, the results of this study could not be seen as a blueprint for future results. Nevertheless, the results show that the performance of ESG-related funds is, with regards to market trends, as vulnerable as the performance of conventional funds. Therefore, I expect that the winner of comparisons between ESG-related and conventional funds will switch from one side to the other depending on the underlying market trends.
From an investor point of view, it is far more important to see if active managers can in general add value to their portfolios or not. As one would expect actively managed funds to outperform their benchmarks during rough market periods, the results of this study might be disappointing for investors.
From my perspective, the Achilles heel of risk management in all kinds of strategies can be seen in the measurement of risk. Most asset managers measure the risk of their portfolios relative to their benchmark or index, which means they will evaluate a negative performance as a success as long as the negative returns are better than those of the respective index or benchmark. Conversely, most investors see negative returns in general as bad results. Therefore, it would make sense that asset managers would implement some risk measures with regards to the absolute performance of their funds to align the interest of investors with the targets of the portfolio managers. Taking the absolute performance into consideration would also help to increase the resilience of a fund since the portfolio manager could use cash as a risk buffer. I certainly know that this is a much-debated topic and that there are different views on this topic in the investment industry. Therefore, I will leave this for another discussion.
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The views expressed are the views of the author and not necessarily those of Refinitiv. This material is provided as market commentary and for educational purposes only and does not constitute investment research or advice. Refinitiv cannot be held responsible for any direct or incidental loss resulting from applying any of the information provided in this publication or from any other source mentioned. Please consult with a qualified professional for financial advice.