The first half of 2016 was quite a wild ride. Markets kicked off the year with their worst start in history. Then, after bottoming out on February 11 they rebounded strongly, with the S&P 500 rallying nearly 20% off the lows. This type of volatile market is what stock pickers and market timers dream about. The extreme highs and lows provide opportunities for opportunistic buying and selling–the perfect environment for the most competitive managers on Wall Street.
As we review performance for the first and second quarters of the year, we should see excellent results from those who make it their business to outperform markets. However, what we’re actually seeing is that active managers are having their worst year in recent history. Less than 18% of U.S. equity active managers are outperforming their benchmark, meaning that nearly five of every six managers have underperformed. We’ve been told that it was the lack of volatility that was causing active managers to underperform so markedly since the 2008 financial crisis, and that the return of volatility would be problematic for passive managers. Yet, through all the volatility this year, a passive investing appraoch has once again outperformed the stock picking method.
Today’s recommended reading, by Dani Burger of Bloomberg, alludes to the idea that underperformance in 2016 may be due to an aging bull market or the sudden ineffectiveness of activist investing. We’d suggest that active managers are underperforming once again for the same reasons they usually do; higher management fees and higher trading expenses mean that active managers will mathematically underperform, especially over longer periods of time. A well-diversified, low cost approach has always been the superior approach to investing, and this has certainly proven evident in 2016.