There is a common perception in the investment world that active managers have an advantage over passive managers during times of increased volatility, as active managers can go defensive, while passive managers have strict mandates to mimic an index.
After an extended period (2012 – 2019) where equity volatility, as measured by the CBOE VIX index, traded below its 20-year average of 20.1, volatility increased during the peak of the pandemic. After a period of low volatility in 2021, volatility rose above its 20-year average in 2022. However, equity volatility fell below its 20-year average and remained there throughout the first quarter (figure 1).
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Despite continued uncertainties about monetary policies and the pace of monetary easing, the S&P 500 index posted a return of +10.56% during the quarter, corresponding to the decline in volatility. With lower volatility and strong equity market performance, let's take a look at how actively managed separately managed accounts fared against their passively managed counterparts during the quarter.
As you can see in the chart below, US actively managed equity SMAs performed well during the quarter. Mid-cap growth and small-cap growth styles were the only equity styles that saw an advantage to passive SMAs, albeit a small one, with just under 50% of active managers outperforming the benchmarks. their respective
As for the large-cap space, that tends to be a more efficient investment style, making it harder to find active managers with consistent performance. During the first quarter, actively managed large-cap SMAs held their own, as about half of all active SMAs beat their respective style benchmark across all three styles. Top and large growth managers fared best with just over 50% of active managers beating the benchmark.
As many might expect, the biggest winners came from small-cap styles. Over 75% of active small-cap SMAs beat the Russell 2000 value index, which wasn't an extremely difficult hurdle as the index posted a +2.9% return. Meanwhile, roughly 70% of the major active small-cap SMAs beat the Russell 2000 index, which was a slightly tougher hurdle as the index posted a +5.18% return.
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The pace of market movements has increased over the years, which makes it important to try to create diversified asset allocation strategies that can cope with different financial market dynamics and the changing investment landscape. It is also important to note that research shows that there are certain styles of capital that tend to benefit from active management over passive management. When building an investment portfolio, it is prudent to take a holistic view rather than an exclusive view of the active vs. passive debate.
Ryan Nauman is a Market Strategist at Zephyr, an Informa company