Well that was a long time coming. Regular readers will know that I’ve been calling for some kind of adjustment to the never-ending equity market rally for quite some time. Most rallies stick around a little longer than is justified, but this one had been in the ninth innings for an interminable amount of time.
The reaction among the media to the introduction of some volatility was generally well considered. But there were plenty of clickbait headlines around too, such as ‘$4 trillion wiped off stock markets’ and ‘Bezos loses billions.’ I’d like to say I didn’t click, but that would be lying.
I write this on Monday, February 12, after a whirlwind few weeks in which the S&P 500 briefly fell into correction territory, before a late-afternoon surge on Friday 9 pulled it back to stabilize at around 8.7% down from its January 26 peak. There were a few horror stories of portfolios massively exposed to the VIX taking a pounding, but in the main funds held up pretty well during what is being called the ‘biggest points loss of all time.’
Large Cap Value continued to be treated like the unwanted stepchild, with the Russell 1000 Value falling the most of all the major US equity indices, down 9%. Full disclosure: I’m a stepchild and naturally think they’re pretty great.
On the other hand, Small Caps fared the best – down 8% – but everything fell pretty much in line with one another, suggesting the selling was largely indiscriminate.
Comparing the average active category returns with the various indices, it is clear that there weren’t any real stinkers. I was hoping for some surprises on the upside though. Given the number of portfolio managers who have been calling for more volatility, you would have expected them to have taken some risk off the table, particularly after an astonishing January.
The largest funds also did pretty well, with the five most popular funds just about managing to outperform their respective indices during the volatility. When looking at the list of the top 10 funds by assets, I was struck by how well a lot of them have done in the years running up to this point, with several of them outperforming their category indices. If they have lagged, it’s not by much. Given that the top 10 have a combined total of $866 billion in assets – 22% of the $4 trillion in actively managed domestic equity funds – this is a major plus point for the much maligned active management industry.
While a lot of the focus has been on how much was lost during this recent spell of market turmoil, the bigger picture here is how competitive the very biggest active managers have been over both the medium- and long-term. Ultimately, that is how market performance should always be assessed.