Indexology^® Blog

For over a decade, our SPIVA^® Scorecards have shown a majority of actively managed U.S. large-cap equity funds underperforming the S&P 500^®. According to the freshly published SPIVA U.S. Year-End 2022 Scorecard, the annual underperformance rate dropped to the slimmest of margins last year: just 51% of large-cap U.S. managers lagged the S&P 500 in 2022.

Two key market trends associated with active performance provide context for this figure. One, explored by Anu Ganti in an earlier blog, was a sharp relative increase in the opportunity for outperformance across a range of global equity markets. Another, specific to large-cap U.S. equities, was a reversal in the trend of strong performance of the largest stocks.

The latter point matters because one of the virtues often claimed for active management is its avoidance of perceived overconcentration in the largest stocks in the benchmark. Accordingly, active equity funds frequently underweight the index’s largest stocks (or at least some of them); if the largest companies outperform, then active funds are more likely to lag and, compounding the issue, the weight of the largest names will have also increased—so that the active funds will, all else equal, be even more underweight. Thus, as and if the largest stocks continue to outperform, active funds might underperform in ever-increasing degrees.

This is exactly what seems to have happened between 2013 and 2021. In the summer of 2013, the largest five companies in the S&P 500 accounted for roughly 11% of the index’s weight. As Exhibit 1 shows, this concentration more than doubled to over 23% by December 2021; not coincidentally, our SPIVA U.S. Year-End 2021 Scorecard reported a one-year underperformance rate of 85% for actively managed large-cap U.S. equity funds—close to a record high for any year of the scorecard’s 20-year history.

However, as can also be seen in Exhibit 1, concentration began to diminish in 2022. Previous market darlings, including Facebook, Amazon, Alphabet, Microsoft, Tesla and Apple, to name a few, underperformed materially. Meanwhile, as the U.S. dollar strengthened, smaller and more domestically oriented names were judged to have better prospects, while previously unfancied companies in the Materials and Energy sectors benefited from a steep rise in commodity prices. Exhibit 2 summarizes the changes in fortune that swept through markets last year, comparing the annualized excess returns (versus the S&P 500) for a range of large-cap indices in two periods: December 2013 to December 2021, and over the full-year 2022.

Will such tailwinds for active managers continue into 2023 and beyond? It is certainly possible. But it is also worth emphasizing that, even now, there is still plenty of ground for active managers to make up if they hope to change the long-term statistics; according to the year-end 2022 scorecard, 91% and 95% of all actively managed large-cap U.S. equity funds underperformed the S&P 500 over 10 years and 20 years, respectively.

If an underperformance rate close to a coin-flip is taken to be a “good” year for active managers, then 2022 was a “good” year. But there were also fewer excuses for underperformance, and the long-term record suggests that the swallow of 2022 performance does not an active summer make.

March 8^th marks International Women’s Day, an event that honors and celebrates women worldwide and that has been observed for over a century. This year’s theme is Embracing Equity, and it highlights the fundamental difference between equality and equity. While these words are often used interchangeably, the former means giving everyone equal opportunities, while the latter recognizes specific circumstances when allocating resources to achieve equal outcomes. But how close are companies to attaining true gender parity?

The Road to Gender Balance

Not only is there an ethical case for gender parity, but also an economic one: enhanced female representation in the workplace could add USD 12 trillion to global GDP.¹ Studies show the added benefits of corporate gender diversity, from entry-level to senior positions, leading to productivity and innovation gains.² Regulation proposals aimed at increasing gender balance are growing, with the EU adopting minimum targets for corporate boards.³ Despite the progress, the road to gender balance is a long one—the World Economic Forum (WEF) estimates that it will take 132 years to close the gender gap.⁴

We explore the share of women in the workforce across regional indices, within management positions and at the board level, as well as the total number of women employed across all functions⁵ (see Exhibit 1). The U.K. is the only region where women cross the 40% threshold for board membership and across total workforce, with Europe and the U.S. closely following. Within the S&P 500^®, women represent 39% of total workforce roles and close to 33% of board appointments.

While weighted averages are helpful, they might not paint the full picture. We examine the distribution of female representation across three functions within the S&P 500. Management and board positions’ frequency distribution tends to be centered around lower percentages of women appointments (see Exhibit 2).

Looking at the S&P 500 from a sectoral perspective, Health Care and Financials lead the charts, with women representing at least 50% of total workforce, having reached gender parity (see Exhibit 3). Conversely, Materials and Energy are the least gender-diverse sectors. It is worth noting the sectoral dispersion between total workforce and boards’ women composition. The difference between most and least diverse sectors for board membership is 7.6%, while for total workforce is 31%.

Retaining Women Talent

Not only are women still underrepresented across most corporate ladder levels, they are also leaving companies at an alarming rate relative to their male counterparts.⁶ Talent retention is increasingly important for women’s career advancement. Employee support programs, such as paid parental leave, flexible working and hybrid arrangements, can be highly beneficial. More than 45% of companies within the S&P 500 adopt flexible working and 40% have paid maternity leave (more than legally required), but only 32% offer paid non-primary parental leave (see Exhibit 4).

Going beyond equal opportunities and creating equal outcomes requires recognizing heterogeneity of women’s characteristics and circumstances, in order to remove systemic barriers that hinder long-term success. Data from the S&P Global Corporate Sustainability Assessment (CSA)⁷ suggests that workplace gender gaps persist across regions, sectors and managerial positions. There is more to do to bring and retain women in the workplace and empower them to attain their full potential. The benefits of doing so are vast and contribute to the UN’s Sustainable Development Goals’ agenda on Gender Equality.

¹ McKinsey Global Institute gender report.

²  Harvard Business Review Research 2019.

³ European Commission announcement.

⁴  WEF Global Gender Gap Report 2022.

⁵  Management positions span junior, middle and senior management roles. Datapoints included in analysis have at least 80% coverage by weight.

⁶ Women in the Workplace Report 2022 within corporate America

⁷ More information on CSA here.

2022 was a challenging year across asset classes, including equities. Exhibit 1 shows that there were declines across the U.S. equities market cap spectrum. For example, the S&P 500^® fell 18% for the whole year; the gains in the fourth quarter were not sufficient to overcome the declines during the first three quarters.

Amid the turbulent environment, S&P DJI’s U.S. equity indices fared well relative to their Russell counterparts, generally outperforming in most months over the past year. For instance, the S&P 500 outperformed the Russell Top 200 by 1.7% in 2022, its largest margin since 2011. The S&P SmallCap 600^® outperformed the Russell 2000 by 4.3%, far above its average annual outperformance since 1995 (1.7%), and the S&P 900 and S&P Composite 1500^® outperformed their Russell counterparts by 1.3% and 1.4%, respectively, both the third-highest margins since 1996.

Information Technology exposure was a key reason for the outperformance of S&P DJI’s indices last year. Exhibit 3 shows that the choice of Information Technology companies (selection effect) accounted for over 80% of the overall S&P SmallCap 600 outperformance against the Russell 2000. Other major S&P DJI’s indices tell a similar story: S&P DJI’s U.S. equity indices benefited from less exposure to, and better selection in, the Information Technology sector in 2022.

The outperformance from S&P U.S. Core Indices helped S&P Style Indices’ relative returns (see Exhibit 4). Most notably, the S&P MidCap 400 Growth outperformed Russell MidCap Growth by 7.8%, the largest margin since 2003. The S&P MidCap 400 Value outperformed Russell MidCap Value by 5.1%, the third-highest margin since 1996.

More broadly, Exhibit 5 shows how the frequency of outperformance by the S&P Style Indices generally increased with the frequency of outperformance by the S&P Core Indices. The frequency of outperformance is based on annual total returns of the S&P DJI indices and their Russell counterparts since 1996. The blue bars represent benchmark indices, while the other two colors represent S&P DJI’s outperformance conditional on the benchmark outperformance of respective style indices. For example, the S&P MidCap 400 outperformed the Russell MidCap index in 51.9% of years between 1996 and 2022. And in years when the S&P MidCap 400 outperformed, the S&P MidCap 400 Growth always outperformed the Russell MidCap Growth.

The past year was an extremely challenging time for the U.S. equity market, but the S&P Core and Style Indices generally outperformed their Russell counterparts. Once again, such differences in return highlight the potential impact of differences in index construction and how different index characteristics can impact relative returns.

The S&P GSCI, the world’s leading commodities benchmark, could not escape the volatile markets experienced in February, as the index fell 3.83% for the month. Despite recent declines, inflation remained high, which kept the U.S. Fed steadfast in its rate-hiking campaign, and expectations for a possible easing by year-end 2023 were squashed in the latest Fed commentary. A strong retracement higher of the U.S. dollar from the weakness seen in January put pressure on all major commodities, which are priced in U.S. dollars globally.

Within the petroleum complex, S&P GSCI Heating Oil took the biggest hit, down 9.33% after a flat January. Warmer-than-expected weather in the U.S. played a role in decreasing demand for the crude oil byproduct. Crude oil supply was ample, with no change in OPEC’s production announced and record volumes of crude exports to China and India from Russia’s Pacific terminals. Russian crude exports to northern European countries ceased after EU sanctions took effect on Feb. 5.

The S&P GSCI Industrial Metals fell 7.82% in February with broad weakness across all metals. Despite China’s easing of COVID-19 restrictions, demand from the world’s leading importer of industrial metals has not recovered yet. China’s latest forward-looking Manufacturing PMI reading showed the fastest growth in a decade, however. The S&P GSCI Nickel fell the most among the industrial metals, down 18.27%. The International Nickel Study Group announced that in 2022, the global nickel market flipped from a deficit to a surplus for one of the key metallic inputs to electric vehicles. The London Metal Exchange’s nickel contract is still in question after last year’s spike in prices, leading other exchanges like the CME to announce in February that they would launch an alternative nickel contract by the end of March.

The S&P GSCI Gold gave back all of its gains from January, ending February with a flat YTD performance. The S&P GSCI Silver fell 12.06% in sympathy with gold. Silver prices tend to be much more volatile than gold, to the downside as well as the upside. The pressure from the industrial metals space was also felt with silver’s global demand making up about 50% of its use.

Within agriculture, S&P GSCI Wheat prices fell the most, down 8.20% YTD. According to S&P Global Commodities Insights, global wheat prices are expected to see further declines due to the likely rise in supplies across producer countries such as Australia, Canada and Russia. After a year of tightened supplies from the start of the Russia-Ukraine conflict, supplies are likely to normalize.

The S&P GSCI Livestock rose 1.29% and was the only sector to end the month in positive territory, with feeder cattle and live cattle leading the way. Cattle prices have risen steadily since their low in May 2022 due to a progressively smaller global herd and global demand remaining strong.

Traditional investors think of portfolios (whether active or indexed) as collections of stocks. We can equally well think of portfolios as collections of factors—defining factor in the academic sense, as an attribute with which excess returns are thought to be associated. If we’re correct in assessing these attributes, it should be possible to explain portfolio performance by reference, not to the stocks that the portfolio owns, but rather to the factors that it embodies.

One way to illustrate this is with reference to factor indices.  It’s obvious, e.g., that a well-constructed value index is tilted toward cheap stocks (i.e., toward the value factor), but it’s equally true, if less obvious, that a value index might have other tilts as well—for example, toward smaller companies, or higher yields, or lower quality. If this is true, then the performance of factor indices might be explained, in part, by reference to multiple factor exposures.

We’ve noted before that one of the most salient features of 2022 factor index performance was the reversal of several multi-year trends. Equal weight beat cap weight, Low Volatility beat High Beta, and most strikingly, Value outperformed Growth. The Value–Growth differential was so large, in fact, that it explained nearly 80% of the variance in returns across other factor indices, as Exhibit 1 illustrates.

Exhibit 1, though interesting, relies on data from only 17 factor indices. Some stocks will be represented in several of these indices, while others might not be included in any. What happens if we ask how factor exposure affected performance at the individual stock level?

We can approach this question by ordering the constituents of the S&P 500 by the factors of interest, grouping into quintiles, and then measuring returns by quintile. The difference between top and bottom quintiles (i.e., between the average return of the stocks most exposed to the factor and the average return of those least exposed) gives us a convenient way to summarize each factor’s influence. Exhibit 2 shows results for 2022.

Yield was the year’s strongest factor by far, as the market’s highest dividend payers beat non-payers by nearly 29%. Value was in second place, with defensive stalwarts Quality and Low Volatility filling out the top four places. The difference between the performances of Value and Growth is quite consistent with the observations we made in Exhibit 1.

Other things equal, as granularity increases, the importance of factors declines. An individual stock will be more heavily influenced by idiosyncratic factors than will be a diversified portfolio. Even at the stock level, however, understanding factor exposures can produce useful performance insights.