As Active Funds Struggle to Outperform, Fee Declines Get Worse

Managers of U.S. large value stocks beat benchmarks by the widest margin in 2022, while U.S. fixed-income managers barely stayed ahead of indexes, according to Investment Metrics.

Illustration by II

Illustration by II

Active management fees continued to decline in 2022.

Post-negotiated fees fell for active managers in most categories last year, including emerging markets equity, U.S. fixed income, and non-U.S. large growth and value equity, according to the latest fee analyzer report from Investment Metrics. The drop in fees was most significant for U.S. fixed-income managers, who experienced an average decline of 7 percent year-over-year. U.S. large growth and value equity managers saw a slight increase of 1 percent in fees.

The report is based on an analysis of over 490 separate accounts and commingled funds with mandates of between $20 million and $75 million.

The decrease in fees appears to correspond with the dismal performance of active managers. According to Investment Metrics, most mandate categories failed to beat their benchmarks at a time when investors could have used some good news. Stocks and bonds plummeted simultaneously in 2022. U.S. and non-U.S. large growth equity managers lagged their benchmarks by -0.7 percent and -1.4 percent, respectively, according to the report. Non-U.S. large value equity managers lagged their benchmarks by 4.7 percent.

Active U.S. fixed income, which beat benchmarks by 0.1 percent, was particularly disappointing. “Normally, the fixed-income asset class protects investors when equity markets crater, but that did not happen in 2022,” Scott Treacy, research consultant at Investment Metrics, wrote in the report. “Unfortunately, at a median level, active managers were not able to perform well in this environment.”

Amid the market turmoil in 2022, some investors argued that active managers had an opportunity to prove that their risk management and stock picking prowess could protect portfolios from some of the worst of the downturn. But the lackluster performance turned in by these managers may put more pressure on active strategies, with experts questioning whether they can compete with alternatives and index funds over the next few years.

Nevertheless, some firms still managed to shine in the unusual investment climate. According to the IM report, U.S. large-cap value managers secured the lead with a median 1-year return of 2.6 percent above the benchmark in 2022. Top performers in the category include Federated Hermes Strategic Value Dividend portfolio, Marshfield Associates Equity portfolio, and Logan Capital’s Concentrated Value portfolio.

“Those active managers that were not able to perform in the down market of 2022 will most likely see their assets go to passive strategies, or to other active managers that performed well in this difficult environment,” Treacy concluded. “Those active managers that have demonstrated their research and stock selection capabilities should begin to push back against fee compression and look [to charge] top-quartile fees compared to peers.”