In 2020, 62.9% of active global ex US managers outperformed the MSCI EAFE Index, gross of fees, with the median manager outperforming by 334 basis points (bps), the highest margin in a decade. The median manager has now outperformed the index in 15 of the last 16 calendar years.
After adding a fee proxy of 70 bps, 60% of managers outperformed the benchmark in 2020, including 26% outperforming by at least 1,000 bps. The majority of managers have outperformed the fee-adjusted index in eight of 12 calendar years since the Global Financial Crisis (GFC).
By style, the median growth manager in the global ex US category bested value and diversified strategies. All three strategies outperformed their respective style benchmarks for the year, although value was the only style to underperform the broad market index. Styles can experience cyclical shifts in the longer term; although growth has usually outperformed since the GFC, value outperformed growth in seven of nine years from the dot-com bubble to the GFC.
On a median basis, managers were significantly overweight the IT sector, which was by far and away the best-performing sector again in 2020. Conversely, managers held underweight positions in all four underperforming sectors, including sizable underweights in consumer staples and real estate.
On a median basis, managers were underweight all six countries to which the MSCI EAFE Index has a weight greater than 5%. The largest absolute underweight was to Japan, whereas the largest proportional underweight was to Australia—both of which outperformed the broader index in USD terms. Global ex US equity managers tend to make numerous off-benchmark country bets. In 2020, there were seven different countries not in the MSCI EAFE Index where at least 40% of managers had allocations: Brazil, Canada, China, India, South Korea, Taiwan, and the United States. The majority of these countries outperformed the broad MSCI EAFE Index in USD terms.
High dispersion in stock returns is often thought to mean more managers will outperform. In fact, no meaningful relationship exists. Rather, stock return dispersion is more likely to increase the dispersion of managers’ excess returns—greater stock dispersion gives managers more of an opportunity to separate from the pack, but this can be to the upside or the downside. In 2020, stock return dispersion reached its highest level since 2009, and manager excess return dispersion reached a new high since data began in 2000.
Persistence in manager outperformance is rare, and movement among performance quintiles is fairly common. Of the top-performing quintile of global ex US equity managers in the 2011–15 period, one quarter placed in the bottom two quintiles over the subsequent five-year period (2016–20). Similarly, 27% of bottom-performing managers in the initial five-year period were in the top two quintiles in the most recent five-year period.