January 22, 2013 3:26 pm

US active managers disappoint in 2012

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Performance issues continued to dog active fund managers trying to deliver superior returns to the US stock market in 2012, according to analysts at Bank of America Merrill Lynch.

Active fund managers of large US stocks registered their best year since 2009 but two-thirds still underperformed the US stock market in 2012 with the average fund lagging the benchmark by 1.3 percentage points.

“More active funds beat their benchmarks [last year] than we have seen since 2009, “ said Savita Subramanian, equity and quantitative strategist at Bank of America Merrill Lynch, noting that 32.4 per cent of funds outperformed the Russell 1000 in 2012 versus 21 per cent in 2011.

Ms Subramanian said that 2012 was “particularly frustrating” for active managers as there were several months, such as August, when a majority of them had beaten their benchmarks. Sustaining gains over the full year had proved difficult for many, however.

Looking forward, Ms Subramanian said she expected to see the performance of active managers improving further if market trading conditions continued to normalise.

Active US fund managers with a focus on growth stocks fared best with almost half (47 per cent) beating the benchmark, helped by strong returns for the technology sector. However, the average growth fund still trailed the Russell 1000 index by 0.1 percentage points.

Less than a quarter (22 per cent) of value managers outperformed and the average underperformance was 2.2 percentage points.

Core or balanced active managers who invested in a combination of growth and value stocks did slightly better, with 28 per cent managing to beat the benchmark. The average level of underperformance by balanced managers was 1.5 percentage points.

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Gary Dugan, chief investment officer for Asia and the Middle East at Coutts, the private bank, said that although active managers in the US had underperformed on average last year, an active approach to global bonds and European equities worked well in 2012.

“The added value of active bond management is particularly crucial when yields are falling to historically low levels,” said Mr Dugan, highlighting Lipper data showing that the median active global bond manager returned 8 per cent in 2012 versus a benchmark return of 4.8 per cent.

Active European equity managers also managed to outperform their benchmark by an average of 4 percentage points in 2012.

“The marked difference in performance between stock markets such as Spain and Germany gave active managers a country divergence to exploit in their stock picking,” said Mr Dugan.

But in other asset classes (emerging market equities and debt, Japanese and Asian equities), active managers underperformed their benchmarks in 2012, according to Lipper.

Supporters of active management such as Henk-Jan Rikkerink, head of equities research for Europe and the US at Fidelity Worldwide Investment insist that fundamental, bottom up company research can deliver results for stockpickers.

Mr Rikkerink said that high levels of correlations between individual equities since the financial crisis had encouraged Fidelity’s analysts and portfolio managers to take a longer term view, looking for companies with a sustainable competitive advantage that also have the support of a structural “theme”.

Among the themes, he highlighted were population ageing leading to rising demand for diabetes products and the growth of “big data” for software suppliers.

“Identifying secular trends based on fundamental bottom-up [company] research is the essence of detecting long-term winners”, said Mr Rikkerink, noting that many high quality businesses were currently trading “considerably below” fair value.

He suggested that if stock market investors did not address these valuation discrepancies then mergers and acquisitions would pick up as private equity and cash-rich companies stepped in to buy smaller players.

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