As economic and market conditions begin to shift, it’s worth exploring when passive funds have performed well and periods when these strategies have underperformed the average active manager.
Catalysts in Play: The prevailing debate in public equities historically revolved around the bulls versus the bears. More recently, two opposing camps have coalesced around divergent philosophies espousing either passive strategies as a relatively lower-cost alternative to portfolio management or an active approach in which alpha is available through fundamental analysis and a bottom-up approach to stock selection.
Entry Points: While fund flows over the past decade gravitated to passive strategies — amid a low-rate environment that fueled nearly uninterrupted economic growth — the rapidly evolving landscape today is forcing allocators to revisit previous assumptions. Many may be discovering that the active-versus-passive debate, even against a benign economic backdrop, may not be as black and white as passive managers make it out to be. In fact, the data shows that active managers can outperform their passive counterparts the majority of the time.1
An Emerging “Equal-Weighted” Tailwind: When the S&P 500 equal-weighted Index has outperformed the S&P cap-weighted Index, the proportion of stocks that outperformed the broader index also tended to grow. It’s during these extended periods — in between the most heated rallies in which index concentration has had an undue impact on performance — that the advantage lied with active managers.2
An Advantage Even More Acute in Value: Active strategies have also outperformed passive strategies in all but two of nine categories when looking across the Morningstar style boxes. Within the value category in particular – where index concentration is less of a factor — active strategies have outperformed passive management over five-, 10-, and 20-year timeframes.1
Active Strategy: While the past five years may have favored large-cap passive strategies, since 1991, returns in the equal-weighted S&P 500 Index have outperformed cap-weighted returns by approximately 1.4% on an annual basis.2
And active strategies over this time have paid off. Since 1995, a $10 million investment in Boston Partners Premium Equity All-Cap value strategy would today be worth $233 million, net of fees. This compares favorably to a similar $10 million investment in either the S&P 500 Index or the Russell 3000 Value Index, which would be valued at $148 million and $121 million, respectively.3
Coming out of the “FANG growth” bubble, we believe an “active tailwind” may be forming that could favor managers in the years ahead.
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Statistics and other information taken from the following sources:
1 Data as of December 31, 2021. Source: eVestment and Boston Partners. Rankings are based on gross of fee returns. Past performance is not a guarantee of future results.
2 Data as of February 28, 2022. Source: Morningstar, Inc. Past performance is not a guarantee of future results.
3 Data as of December 31, 2021. Source: Boston Partners. Data is from a hypothetical illustration of the growth of $10 million had it been invested in the BP Premium Equity Composite since inception on June 1, 1995. The results of this illustration may be changed depending on investment guidelines and cash flow. The illustration is net of investment management fees and includes the reinvestment of dividends and other income.
Definitions:
Equal weighted S&P 500 Index: The equal-weighted version of the widely-used S&P 500 where each company is allocated a fixed weight at each quarterly rebalance.
S&P 500 Index (Cap Weighted): An unmanaged index of the common stocks of 500 widely held U.S. companies. The S&P 500 Index uses capitalization-weights, which gives a higher percentage allocation to companies with the largest market caps; stocks are weighted according to the total market value of their outstanding shares.
Russell 3000® Value Index: Measures the performance of those Russell 3000 Index companies with lower price-to-book ratios and lower forecasted growth values. The stocks in this index are also members of either the Russell 1000® Value or the Russell 2000® Value Indices.
Boston Partners Global Investors, Inc. (“Boston Partners”) is an Investment Adviser registered with the Securities and Exchange Commission under the Investment Advisers Act of 1940. Registration does not imply a certain level of skill or training. Boston Partners is an indirect, wholly owned subsidiary of ORIX Corporation of Japan (“ORIX”). Boston Partners updated its firm description as of November 2018 to reflect changes in its divisional structure. Boston Partners is comprised of two divisions, Boston Partners and Weiss, Peck & Greer Partners (“WPG”).
The views expressed reflect those of Boston Partners as of February 2022. Any such views are subject to change at any time based on market and other conditions and Boston Partners disclaims any responsibility to update such views. Discussions of market returns and trends are not intended to be a forecast of future events or returns.
