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Active Funds Performed Poorly This Year. And That Could Continue in 2020.

The underperformance is likely to continue into 2020, according to Bernstein strategist Sarah McCarthy.

The underperformance is likely to continue into 2020, according to Bernstein strategist Sarah McCarthy.

Active fund managers have had a tough year, and that’s likely to continue into 2020, according to Bernstein strategist Sarah McCarthy.

So far in 2019, all of the long-only fund groups tracked by Bernstein—those that buy securities, rather than seeking to gain from declines in their prices—are underperforming their respective benchmarks, wrote McCarthy in a Wednesday note.

In Europe, fundamental funds, which assess stocks’ quality on an individual basis, returned 1.54 percentage points less than their benchmarks year to date, while U.S. fundamental funds delivered 1.06 percentage points less.

Quantitative funds with a more systematic approach did even worse, falling short of their benchmarks’ performance by an average of 2.14 percentage points year to date.

Active managers’ pain is to some extent caused by the fact that the behaviors of different stock groups—although in diverging directions—are very dependent on a single driver—whether bond yields are rising or falling, noted McCarthy.

Cheaply traded groups—such as value stocks—tend to move higher as bond yields rise, while expensive factor groups—such as momentum and low-volatility stocks—tend to drop.

The same dynamic can be found across sectors. Cheap sectors like banks and energy react positively to higher yields, while expensive sectors such as utilities and real estate move in the opposite direction.

An environment where bond yields are the single most important market driver not only makes it difficult for managers to stand out from the crowd, it also leaves them vulnerable when the tide suddenly shifts.

At the start of September, when 10-year Treasury yields started recovering after declining for almost a year, the equity market saw a sharp move out of momentum and low-volatility stocks in favor of value names that had long been underperforming the market. That likely hurt the performance of active managers holding momentum shares, for example.

Ten-year yields have stayed volatile since then, making life particularly difficult for active managers.

Bernstein’s forecasting model doesn’t point to a good year for active managers in 2020, either. “Managers who proactively control their total factor risk and try to focus on idiosyncratic returns might fare better,” wrote McCarthy.

Write to Evie Liu at evie.liu@barrons.com

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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