Despite Expectations of a Comeback, Active Funds Underperformed in 2022

Many expected active funds to shine last year. But, for the 13th straight year, that didn’t happen. It was close: The S&P Indices Versus Active report—known as Spiva—found that 51% of U.S. large-cap stocks funds trailed the
S&P 500
index. Overall, 2022 “was the best underperformance we saw since 2009 and the fourth-best in the 20 years we’ve been producing the scorecard,” says Anu Ganti, senior director of index investment strategy at S&P Dow Jones Indices and a co-author of the report.

The S&P 500’s total return ended 2022 down 18%, while bonds offered scant protection. Market volatility was high. One way to think about volatility is dispersion, the spread of returns in an index or market. “What we saw last year was relatively higher dispersion, and what that means is, if you’re a stockpicker, and if you have skill, and if you make the call right, there’s greater potential to add value from stock selection,” says Ganti. Another factor: Megacap stocks, after eight years of outperformance, slumped. “Active equity funds tend to do better when megacap names are underperforming, as it can be tougher to overweight those names,” she says.

Spiva found that 63% of mid-cap funds, and 57% of small-cap funds, underperformed, compared with 41% of small-cap value and 40% of small-cap core. Most international funds underperformed. Real estate and mid-cap growth experienced the highest underperformance at 88% and 91%, respectively. Active bond funds fared better: Just 6% of core-plus bond funds, 21% of general investment-grade funds, and 34% of investment-grade short and intermediate funds underperformed.

Write to Lauren Foster at lauren.foster@barrons.com

Last Week

A Hawkish Powell

Indexes opened the week quietly, waiting for Federal Reserve Chairman Jerome Powell’s congressional testimony and the February jobs report. Stocks sold off after Powell warned of possible higher rate rises to quell inflation. Then bank jitters sent shares plunging. Jobs Day turned out to be mixed: Payrolls topped forecasts at 311,000, though wages cooled and unemployment ticked up. On the week, the
Dow Jones Industrial Average
slumped 4.44% to 31,909.64; the S&P 500 shed 4.55% to 3861.59; and the
Nasdaq Composite
lost 4.71% to 11,138.89. Ugly.

Implosion at
SVB

California seized Silicon Valley Bank on Friday—the largest bank failure since 2008—and named the Federal Deposit Insurance Corp. as receiver. SVB touched off a global bank selloff after unloading bonds at a $1.8 billion loss as tech-heavy deposits flowed out; shares of its parent SVB Financial Group fell some 60% on Thursday, a day after it attempted a $2.25 billion stock sale. Some venture firms urged investors to pull their money. Separately, crypto bank
Silvergate
said it would liquidate.

The Budget Battle

President Biden disclosed a Medicare solvency plan that featured a tax hike and a number of cost-savings provisions, and a full $6.8 trillion budget plan with $3 trillion in savings. Republicans rejected any tax hikes. Moody’s Chief Economist Mark Zandi warned a Senate subcommittee that defaulting on the debt would trigger a recession, a loss of seven million jobs, and a financial crisis akin to 2008.

Xi’s Reset

China set its 2023 growth goal “around 5%” at the National People’s Congress, the lowest in three decades, after falling short of its goal in 2022, when it was still struggling with Covid. China’s foreign minister warned the U.S. not to try to “contain” the country, calling it hypocritical to support Ukraine while threatening China over supporting Russia. The NPC passed a broad restructuring of the state bureaucracy.

Twitter’s Info Wars

The Federal Trade Commission sought information on Elon Musk’s internal communications at Twitter, which Musk described in a tweet as “a shameful case of weaponization of a government agency.” The European Union rejected Musk’s plan to use artificial intelligence and volunteers to moderate disinformation, demanding he hire more humans.

Annals of Deal Making

KKR’s
attempt to buy the landline operation of
Telecom Italia
ran into competition from Italian state lender CDP and a unit of
Macquarie Group.
KKR’s proposal sets a price of 20 billion euros ($21.3 billion) for the unit. The deal needs Italy’s approval…The Financial Times reported that private credit groups Blackstone, Apollo Global, and
Ares Management
are close to sealing a deal to provide $5.5 billion to
Carlyle Group
to buy a 50% stake in healthcare analytics company Cotiviti from Veritas Capital, edging out the big banks…The Justice Department filed a lawsuit to block
JetBlue’s
merger with
Spirit Airlines.