For the seventh straight year, the majority of active mid- to large-cap managers underperformed in 2020, with 63.9% lagging the benchmark (gross of fees). The median manager underperformed the Russell 1000® Index by 576 basis points (bps) for the year. Taking fees into account (using a proxy of 60 bps), the percentage of underperformers increases to 65.2%. Style preference had a big impact; the median growth manager in our universe performed very well against the Russell 1000® Index, but underperformed the Russell 1000® Growth Index, whereas the median value manager (a larger subset of our overall universe) underperformed the Russell 1000® Index but outperformed the Russell 1000® Value Index. Overall, more than one-fifth of managers outperformed the fee-adjusted and style-adjusted indexes by at least 1,000 bps.
Growth stocks once again bested value stocks in 2020. The performance gap between the median growth and value manager was 2,935 bps, one of the widest margins on record since data began in 1976. Active growth managers posted returns 2,003 bps above the overall median for the year, marking the fourth consecutive year where growth managers bested the composite median by more than 400 bps. Conversely, value managers lagged the composite median by 932 bps.
The success of active managers is cyclical and affected by several factors. Some favorable factors include: larger companies underperforming, US stocks underperforming other developed markets peers, and cash outperforming stocks. None of these factors were present in 2020, as the Russell 1000® Index outperformed the equal-weighted Russell 1000® Index by 460 bps, the Russell 1000® Index topped the MSCI EAFE Index by 1,320 bps, and T-bills lagged the Russell 1000® Index by 2,030 bps.
Sector allocation can also play a role in relative performance. Managers were heavily underweight two of the three top-performing sectors (information technology and communication services), which together accounted for nearly two-thirds of the Russell 1000® Index’s 21.0% return in 2020. Managers’ two largest overweights—industrials and financials—underperformed and dragged on manager performance.
High dispersion in stock returns is often thought to mean more managers will outperform. In fact, the relationship is weak. Rather, stock dispersion increases 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, the dispersion of stock returns reached its highest level in 20 years, while manager performance dispersion reached a new peak based on data since 1980. However, the percentage of managers outperforming was in the bottom quartile of observations over the same 20-year period.
Persistence in manager outperformance is rare, and movement among performance quintiles is fairly common. Of the top-performing quintile of US mid- to large-cap equity managers in the 2011–15 period, slightly more than a quarter placed in the bottom two quintiles over the subsequent five-year period (2016–20). Long term, nearly all managers in the top-performing quintile over the past ten years experienced below-median returns for at least one three-year period, a factor that endures regardless of investment style.