There was a wide variation between the best and worst-performing active managers in the first quarter of the year, according to an analysis by bfinance, with managers focused on the ‘quality’ investment style performing best in developed markets.
While the top quartile of active managers outperformed in all regions relative to their benchmark indices, the disparity most apparent in global developed markets, with a 42% differential between the top-performing and worst-performing strategies, noted Rob Doyle, bfinance's director of public markets in a webinar attended by 260 investors that took place on Wednesday.
Within global developed markets, the top 25% of active manager outperformed the MSCI World Index by 3.6%, though in emerging markets the outperformance was just 0.9%.
For pan-European active funds, the top quartile outperformance was 4% versus, 3.3% for US funds, 2.6% for Asia excluding-Japan, and just 0.9% for Japanese focused funds.
Quality characteristics
Looking at investment style, ‘value’ markedly underperformed across all regions, with ‘high dividend’ stocks also lagging.
Generally, ‘quality’ and ‘low-volatility’ are expected to outperform and show up in down markets, Doyle said, which proved the case through February and March.
Looking at global developed markets, all 'value' characteristics were severely negative as were factors relating to 'high dividend' equities, while 'high volatility' stocks also trailed.
Both 'quality' and 'growth' exposure were rewarded in the quarter, in whichever way a manager might define them, while having a large-cap bias and momentum from 2019 both also performed well in the first quarter.
Managers with the purest portfolio exposure to ‘quality’ stocks -- as defined by bfinance rather that the managers' opinion -- performed best in developed markets, averaging nearly an 8% outperformance to their benchmarks.
“Managers focused on 'quality' typically have significant positions in the consumer staples, healthcare and IT sectors, focusing on companies with strong competitive advantages, high levels of cashflow and business models that can, in theory at least, best withstand economic downturns,” Doyle said.
“At the other end of the scale, managers with a dominant 'value' style trailed the benchmark by an average 6.4%. So if your 'value' manager underperformed in Q1 they certainly were not alone.”
Looking at other down markets in history, 'quality' and 'low-volatility' managers have consistently shown their ability to outperform.
“Neither 'growth' nor 'value' managers have typically fared very well in these environments,” he added.
“So arguably that traditional decision between growth and value is becoming less relevant given that investors now have a wide range of other styles to choose from.”
With ESG (environmental, social and governance) investing a big focus for many investors in the past 18 months, Doyle pointed out that the managers with a big a positive tilt to ESG versus the benchmark tend to be in the Quality space.
“A dedicated ESG composite is something we’ve looked at… ESG is not in and of itself typically considered in the context of a manager’s broader investment approach, so being factored in alongside other elements.”
Hedge fund and liquid alternative strategies
In hedge funds and other ‘liquid alternatives’, bfinance identified that outright positive monthly returns for the first quarter were “few and far between, except for explicit long volatility/tail risk protection strategies which largely did their job”.
Elsewhere, investors could consider they enjoyed a “win” in March if losses were limited to low single digits or better.
Pure trend-following was a bright spot, bfinance observed, with average returns for CTAs (commodity trading advisers, basically managed futures funds) were 2-3% in March, with some higher volume strategies up close to 10%.
Diversified CTAs and systematic macro funds gave flat-to-slight-negative returns, on average, with gains mainly from fixed income, currencies and short positions on oil.
Strategies that struggled most in March were 'event driven', which was down 12%; 'merger arb', which down 9% thanks in large part to indiscriminate (and often dramatic) spread-widening; 'long/short equity', down 9.5%; and 'relative value', which was down 6.5%.
Alternative risk premia suffered its worst ever quarter, losing 6% on average with particular pain from 'equity value' strategies.
Multi-asset managers had a relatively robust quarter on average, with the Global Absolute Return cohort “acquitting themselves nicely”, says bfinance, by keeping March losses to low single digits.