Good and bad news for active funds

Good news for active fund managers: the percentage who outperformed the S&P 500 last year was the highest since 2009. Now the bad news: a majority still underperformed, with the latest S&P Dow Jones Indices Scorecard showing 51 per cent lagged the S&P 500 in 2022.

Active managers have long cautioned that index investors risk being over-concentrated in the largest stocks. Thus, active funds often underweight the largest stocks. This means they may lag if the largest companies outperform.

S&P notes the five largest companies accounted for 23 per cent of the index in 2021, compared to 11 per cent in 2013. Not coincidentally, 85 per cent of active funds underperformed in 2021, one of the worst performances in the scorecard’s 20-year history.

However, 2022 was much more favourable in this respect. Mega-cap giants like Apple, Amazon and Tesla badly underperformed. Consequently, most S&P 500 stocks (59 per cent) outperformed the index itself. Almost a third beat it by 20 per cent or more.

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Despite these helpful conditions, half of fund managers failed to beat the index. Worse, their long-term record remains horrendous – 91 and 95 per cent underperformed the index over 10 and 20 years, respectively. Outside the US, a majority of funds underperformed in every category in 2022.

The end result: 2022 was one of the best years for active managers in decades, but investors were still better off in index funds.