Another Rough Year for Mutual Funds

Regardless of what the S&P 500 is doing, though the saying pops up more in trying environments, it’s often said “it’s a stock pickers market.”

From that, it’s reasonable to assume active management is thriving in terms of producing admirable returns. However a spate of data from the S&P Indices Versus Active (SPIVA) going back years indicate it’s been awhile since active management – for both bonds and stocks – has delivered the goods for investors.

With the S&P 500 down almost 17% year-to-date and the Bloomberg US Aggregate Bond Index lower by 11%, 2022 – in theory – should be prime time for active managers to shine.  After all, opportunities are abound for fund managers to outshine broader market. Unfortunately, data to that effect are rather dismal, indicating market participants could be further compelled to embrace passive management.

Undeniably Dour Data

When it comes to financial markets, it often pays to trust the data and when it comes data pertaining to active funds, advisors and investors ought to take heed.

“As of the end of July, 97% of all mutual funds, active and passive, had negative returns. The losses were slightly more plentiful in fixed income, given how rates have risen and credit spreads have widened in 2022. So far, 99% of fixed income mutual funds have losses, compared to 96% of equity funds,” according to State Street Global Advisors (SSGA).

Sure, it can be said fixed income mutual funds, active and passive, are under duress due to rising interest rates. That’s an accurate, fair assertion. Still, the active funds, broadly speaking, don’t have great excuses because those managers can allocate away from the most rate-sensitive corners of the bond market and, potentially, deliver less bad performances than their benchmarks.

Unfortunately, that’s not happening and the losses being incurred this year by mutual funds are historically bad. Data confirm that point, too.

“Dating back to 2001, this is the worst year for performance — even worse than during the Great Financial Crisis in 2008. While year to date equity returns are not worse than 2008’s, the current significant weakness in fixed income pushes the total number of funds with losses in 2022 29 percentage points higher than in 2008,” adds SSGA.

As advisors know and as noted above, some mutual funds are passively managed. Active or passive, the data remain ugly for mutual funds.

“As of the end of July, 60% of active mutual fund managers have underperformed their stated benchmark. This is the highest underperformance rate since 2018 — and higher than the 53% historical average of managers underperforming dating back to 2001,” notes SSGA. “And similar to the absolute returns shown above, fixed income strategies have had the weaker results. Nearly 70% of all active fixed income managers have underperformed their benchmark so far this year, well above the historical average of 57%.”

The Winners Is…ETFs

With mutual funds of both management styles frustrating investors, it’s not surprising that exchange traded funds continue to capture assets – nearly $44 billion in August, which was a rough month for equities.

Adding to the case for ETFs, even in declining markets, is that a scant percentage of ETFs, active or passive, equities or fixed income – lob off capital gains. We recently explored that topic and the tax benefits offered by ETFs. That’s a point to ponder when looking at the history of annual equity market losses – three such instances of which were experienced over the past two decades.

“In each of those three years, the percentage of mutual funds paying capital gains – active, passive, and across asset classes – was greater than the historical average, as shown below. Examining those three years and 2020, which also featured a brief bear market, along with fund flow patterns points to a potentially higher number of mutual funds distributing capital gains this year,” concludes SSGA.

Bottom line: This is shaping up to be a dreadful year for mutual funds and that opens the door to more market share gains by ETFs.

Related: Benefits of Bond ETFs Over Mutual Fund Rivals