US small cap stocks significantly underperformed large cap stocks by -8.4 per cent in 2017, generally hampering strategies that incorporate more of an equal weighting of securities versus their capitalisation-weighted indexes, and US value stocks notably underperformed growth by -11.4 per cent.
That’s according to Wilshire Consulting’s 2017 Active Management Review which provides a study of systematic returns and the underlying factors driving market returns over the last ten years, as well as a review of active management results within various segments of the equity and fixed income markets.
The review is based upon manager universe statistics gathered from The Wilshire Compass analytical tool, an investment technology system with capabilities in asset allocation, investment structure, as well as manager and total fund evaluation. The tool draws upon information from Wilshire’s Investment Database covering over 11,000 separate account products.
The Momentum and Volatility factors experienced positive returns in 2017, benefiting strategies that attempt to ride momentum trades and serving as a mild headwind against strategies that prefer low volatility stocks, respectively.
Emerging markets stocks significantly outperformed developed markets (+12.3 per cent net), providing a strong tailwind to international managers with persistent tilts towards emerging markets, and US Dollar weakness in 2017 contributed 9.0 per cent to the US Dollar-based returns of international equities relative to local returns.
High yield bonds outpaced the core fixed income market (+4.0 per cent net), challenging the relative returns of managers who lean towards bonds of higher credit quality.
US large cap equity manager universes had mixed results in 2017, but generally struggled to add value on a net-of-fee basis – particularly in the Large Growth and Large Core universes. The Large Value segment, however, did show 84 per cent of managers beating the index over the past ten years with a median excess return of 1.18 per cent.
Within US small cap equity segments, Small Growth and Small Value managers delivered positive median excess returns in 2017, up 1.07 per cent and 1.50 per cent, respectively. Non-US developed market equity universes also showed positive returns for the year, with the Developed ex-US universe and its small cap segment delivering median gross-of-fee excess returns of 1.98 per cent and 1.53 per cent, respectively.
The Emerging Markets universe in contrast notched a gross-of-fee median excess return of 0.33 per cent, while the median Global manager trailed the index by -0.91 per cent.
The US Core and High Yield bond universe had a difficult time keeping pace with their indexes in 2017, with median gross-of-fee underperformance of -0.17 per cent and -0.43 per cent, respectively. High yield managers have struggled to keep pace with the index over the long term, with nearly 80 per cent of the universe trailing on a gross-of-fee basis over the past ten years.
“Our general expectations across the capital markets are for the average/median manager to generate long-term gross-of-fees performance that is market-like. As such, once accounting for fees, we would expect average active results to trail passive indexes,” says Steve Foresti (pictured), Chief Investment Officer of Wilshire Consulting. “That said, we do not view this as an indictment against the pursuit of active management, but rather as further evidence that a robust qualitative manager due diligence process is critical within an active management program.”
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