By CRAIG LAZZARA from S&P Dow Jones Indices
Last week S&P Dow Jones Indices released its SPIVA U.S. Year-End 2020 Scorecard. As has been the case for 17 of the past 20 calendar years, the majority of active large-cap managers underperformed the S&P 500
. Performance was better for mid- and small-cap managers, as Exhibit 1 shows. What caused the advantage for smaller-capitalisation strategies?
supplies part of the answer. We refer to “style bias” as any
tendency in an actively-managed portfolio. For example, if a portfolio habitually tilts toward growth stocks, we’d refer to this tilt as a growth bias. (This is different from making
allocations between growth and value, depending on a manager’s judgment of their relative attractiveness.)
. Simple as it seems, style bias has much to say about active management. Exhibit 2 examines quarterly data on the relative performance of the S&P 500 and the S&P MidCap 400. Of 76 quarters between 2002 and 2020, the S&P 400
outperformed the S&P 500 in 42. In those quarters, a majority of large-cap managers outperformed the S&P 500 15 times for a 36% hit rate. In contrast, in the 34 quarters when the S&P 500 beat the S&P 400, the frequency with which most large-cap managers outperformed fell to 12% (4/34).
We see an analogous effect among mid-cap managers, as shown in Exhibit 3. When the S&P 400 outperformed the S&P 500, the frequency with which most mid-cap managers outperformed was 24% (10/42). When the S&P 500 dominated, however, the likelihood that a majority of mid-cap managers would outperform was 59% (20/34).
Historically, large-cap managers perform better when mid-cap stocks beat large caps, and mid-cap managers perform better when large caps beat mid-caps. These results suggest that the average large-cap manager has a small-cap tilt relative to his benchmark, while the average mid-cap manager has a larger-cap tilt. These inferences, which are quite reasonable, help explain SPIVA’s 2020 results.