Varying domestic large and small cap stocks, the rising of emerging markets, and high–yield managers experiencing some trouble were just a few of the talking points of Wilshire Consulting’s eighth annual 2017 Active Management Review.
US small and large cap stocks experienced some pains, and although small caps underperformed their large cap counterparts by -8.4% in 2017, US large cap equity manager universes had some problems with adding value on a net-of-fees basis, most notably in the large growth and large core universes. However, the large value segment saw 84% of managers beat the index over the past 10 years, with an average 1.18% excess return.
Small growth and small value managers also saw healthy median excess returns over the previous year of 1.07% and 1.50%, respectively. Additional positive returns came from non-US developed market equity universes, with respective median gross-of-fees excess returns of 1.98% and 1.53% from the developed ex-US universe and its small cap segment.
According to the report, the heavy hitter came in the form of emerging markets, which saw stocks outperform developed markets by a 12.3% net. The emerging markets universe saw a 0.33% gross-of-fees median excess return.
Outpacing the core fixed income market were high–yield bonds by a 4% net, which reportedly challenged the relative returns of managers who find higher–credit bonds more attractive. However, the US core and high–yield bond universe experienced issues keeping pace with their indexes in 2017. US cores underperformed by a median gross of fee of -0.17% while high–yield bonds suffered a -0.43% misstep. Wilshire reports that nearly 80% of the high–yield manager universe has been struggling to keep pace with the index over the past decade.
The report also noted that US value stocks underperformed growth by -11.4%.
“Our general expectations across the capital markets are for the average/median manager to generate long-term gross-of-fees performance that is market-like. As such, once accounting for fees, we would expect average active results to trail passive indexes,” Steve Foresti, Wilshire Consulting’s CIO, said in a statement. “That said, we do not view this as an indictment against the pursuit of active management, but rather as further evidence that a robust qualitative manager due diligence process is critical within an active management program.”