Here’s Where Active Managers Outperformed in 2022

Active management worked best in equity and value strategies, according to Verus Investments.

Illustration by II

Illustration by II

Last year’s challenging market environment in 2022 gave active managers a chance to flex their skills — and many of them delivered.

The percentage of active managers generating excess returns over the market increased from 2021 to 2022 across a number of different investment strategies, according to the latest active management report from Verus Investments. Among U.S. large-cap growth funds, for example, 45 percent outperformed the market last year, up from 21 percent in 2021.

“It is likely that continued uncertainty in markets results in an attractive environment for skilled active managers to outperform benchmarks,” the report said. Active managers have long argued that they do their best work during volatile times because they can respond to market-changing events. For example, during Russia’s invasion of Ukraine in 2022, active managers like Baillie Gifford dumped most of their Russian assets within a week of the war’s onset.

But the level of outperformance varies greatly by strategy, according to Verus. Value managers, in general, had an easier time beating benchmarks than their growth peers last year. Among U.S. large cap funds, the median excess return for core and value managers was 1 percent and 1.1 percent, respectively. Meanwhile, large-cap growth managers underperformed the market by 0.9 percent. Core and value managers also demonstrated greater outperformance in the U.S. small-cap stocks last year, with both generating a greater than 1 percent excess return, while small-cap growth managers lagged the market by 1.3 percent.

“What we found with growth managers is that environments [in which] mega-cap stocks, such as Amazon and Apple, are doing really well and becoming larger in size tend to make it difficult for active managers,” Thomas Garrett, managing director at Verus, told II in an interview.

He explained that this is likely due to the fact that active managers often underweight these mega-cap names. “When [investors] pay fees to an active manager, they’re not expecting that manager to just hold those big stocks,” he said. “They’re hoping that the active managers are going to go out and find the underappreciated stocks that are smaller than those mega-cap names.”

Fixed-income managers also had a more difficult time last year. According to a separate report from eVestment, 62 percent of actively managed U.S. fixed-income products outperformed their respective benchmarks last year, down from 74 percent in 2021.

Among European bond funds, the percentage of actively managed products that outperformed their benchmarks also decreased, from 72 percent in 2021 to 61 percent in 2022. According to the Verus report, the tightening cycle in the U.S., U.K., and European Union largely contributed to the challenging environment for bond managers in these regions.

“In many fixed-income asset classes, the active managers who [took] more risk overall were the ones who tended to do worse,” Garrett said. “Much of 2022 was a really tough environment for bond managers.”

Despite the overall challenging environment, Verus expects bond managers in the high-yield space to outperform in 2023. Last year, 81 percent of actively managed U.S. high-yield products beat the benchmark, the second-highest percentage across active U.S. fixed-income products, according to eVestment.

“Active management in high yield has the potential to benefit from skilled managers able to identify bonds with attractive valuations and positive fundamentals, thus avoiding idiosyncratic risk resulting from ratings downgrades or defaults,” the report said.