S&P Dow Jones Indices, a division of S&P Global, has published an updated ‘SPIVA Scorecard’ report that takes into account the impacts of the COVID-19 pandemic, and other major events, on global equity markets during the last year. The report gets its SPIVA name from the fact that it comes S&P operated indices versus actively managed investments.

According to the latest SPIVA report, the S&P 500 had recovered all of its COVID-19-related losses by August 2020, and it posted a 40.8% gain over the 12 months ending on June 30, 2021. Of the 31 distinct benchmarks tracked by the report, 27 finished with a positive return over the year, and the exceptions were among longer-term fixed-income indices.

As the report authors observe, the positive market performance broadly translated into good absolute returns for active fund managers, yet relative returns compared with passive managers continued to disappoint.

“In 15 out of 18 categories of domestic equity funds, the majority of actively managed funds underperformed their benchmarks,” the report says. “The performance was particularly underwhelming in the small-cap space, as 78% of all small-cap funds lagged the S&P SmallCap 600.”

Report authors Berlinda Liu and Gaurav Sinha, the former a director and the latter a managing director at S&P Dow Jones Indices, say it is worth taking a moment to delve deeper into differences across market cap segments.

“Over the 12-month period, 58% of large-cap funds, 76% of mid-cap funds and 78% of small-cap funds trailed the S&P 500, the S&P MidCap 400 and the S&P SmallCap 600, respectively,” they write. “At first glance, this isn’t particularly new. SPIVA year-end reports have shown that more than 50% of large-cap funds have lagged the S&P 500 each year for 11 consecutive years. However, fund managers in the mid-cap and small-cap segments have often managed to do better than their large-cap counterparts when the large-cap benchmark had a higher return than the respective mid- or small-cap benchmark, in ways that are not consistent with the ‘greater skill’ premise. Instead, it is more likely that mid-cap and small-cap fund managers are quietly edging into the larger-cap space and benefiting from the higher returns available there.”

Liu and Sinha suggest the reopening gains of early 2021 add one more data-point to this hypothesis.

“As the rest of the market caught up to the large-cap rally of the initial pandemic phase, mid-cap and small-cap managers who tilted up the capitalization scale were caught leaning in the wrong direction,” the authors propose. “Many funds quickly fell short of the benchmark.”

The report also assesses returns of actively managed funds against their benchmarks on a risk-adjusted basis. The authors consider volatility in this analysis, calculated through the standard deviation of monthly returns, as a proxy for risk, and they use return/volatility ratios to evaluate performance.

“After adjusting for risk, the majority of actively managed domestic equity funds in all categories underperformed their benchmarks on a net-of-fees basis over long-term investment horizons,” the authors find. “The few bright spots in the mid-term investment periods were concentrated in mid- and small-cap growth funds and real estate funds.”

Other findings in the report show, in a period of mostly climbing yields, fixed-income funds posted better relative results than their benchmarks. In 12 of the 14 categories tracked, the majority of funds outperformed the relevant index benchmark.

“However, if we widen the lookback window to three years, the majority outperformed in just four categories,” Liu and Sinha warn. “For those with a long-term view, in no fixed income category did the majority of funds manage to surpass their benchmark over a 15-year window.”