Fund Managers Lag S&P 500 As 60% Underperform In First Half Of 2023: Here's Why

In the world of active fund management, the first half of 2023 has proven to be a tough battleground.

According to S&P Dow Jones Indices latest SPIVA U.S. Scorecard, a staggering 60% of all active large-cap U.S. equity managers fell short of the benchmark S&P 500.

This revelation comes as the latest blow against active approaches in the ongoing debate between active and passive investment strategies.

The report, overseen by Craig J. Lazzara, CFA, paints a stark picture of active underperformance in the first six months of the year.

In a historical context, it’s worth noting that the majority of large-cap managers have underperformed in 20 of the last 23 years, emphasizing the persistent challenge faced by active funds.

Source: SPIVA U.S. Scorecard Mid-Year 2023

Contrasting Fortunes With 2022

In stark contrast to the previous year, where 49% of active managers focusing on large-cap companies outperformed the S&P 500, 2023 has seen a different story unfold.

S&P Global points out that some factors that favored active managers in 2022 have reversed their course, creating headwinds in the first half of this year.

Concentration Of Returns

S&P Global’s report also sheds light on an interesting phenomenon—a concentration of better-than-average returns within a limited pool of companies.

Remarkably, only 28% of the stocks in the S&P 500 managed to outperform the index during the first half of 2023. This performance concentration has significant negative implications for active managers, because they tend to underweight the market-cap giant within the index.

Challenge Of Index Composition

For the first six months of 2023, the relative performance of the S&P 500 Equal Weight Index, as tracked Invesco S&P 500 Equal Weight ETF RSP, was at the historical bottom-end of the distribution, highlighting how the median stocks struggled to outperform.

Conversely, in 2022, the weak performance of the giants played a role in favoring active management.

The SPDR S&P 500 ETF Trust SPY has shown a year-to-date gain of 13%, in contrast to the S&P 500 Equal Weight’s stagnant performance.

Long-Term Gloom For Active Managers

S&P Global’s report isn’t just a snapshot of the first half of 2023, it’s a reminder of the broader trends in the active vs. passive debate. As the time horizon lengthens, the underperformance of active managers widens further.

After 15 years, there were no categories in which the majority of active managers outperformed their respective benchmarks.

In the realm of large-cap active funds, nearly 97% of them failed to beat the S&P 500 over a 15-year horizon. This underscores the ongoing challenge for active managers to consistently outperform market benchmarks.

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