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

Funds Trusts/Funds/Financial Vehicles Financial Services Investing/Securities McCarthy Sarah McCarthy I/IAV M/FCL Barrons.com Barrons Blogs CODES_REVIEWED Funds Investing author Evie Liu author|Evie Liu author Evie Liu id Evie Liu name Evie Liu topicid 8574 rank 1 topicid barrons_display_subject BARFUNDS barrons_display_subject|BARFUNDS canbedisplaysubject true codetype BARRONS_DISPLAY_SUBJECT name Funds source MANUAL value BARFUNDS code BARFUNDS status modified djn M/FCL djn|M/FCL codetype djn name M/FCL why lineage source FACTIVA code m_fcl fcode M/FCL djn I/IAV djn|I/IAV codetype djn name I/IAV why lineage source FACTIVA code i_iav fcode I/IAV editorial-seo-id active-funds-passive-performed-poorly-this-year-this-is-why-51574887712 editorial-seo-id|active-funds-passive-performed-poorly-this-year-this-is-why-51574887712 first_publish_headline Active Funds Performed Poorly This Year. This Is Why. first_publish_headline|Active Funds Performed Poorly This Year. This Is Why. flow Barrons.com flow|Barrons.com codetype FLOW name Barrons.com source MANUAL value Barrons.com code online status modified name Online title Product code Barrons.com flow Barrons Blogs flow|Barrons Blogs codetype FLOW source MANUAL title Product code Barrons_Blogs name Barrons Blogs value Barrons Blogs status modified headline Active Funds Performed Poorly This Year. And That Could Continue in 2020. headline|Active Funds Performed Poorly This Year. And That Could Continue in 2020. id facebook id|facebook news_tab_url https://www.barrons.com/articles/active-funds-passive-performed-poorly-this-year-this-is-why-51574887712 in i81502 in|i81502 codetype in why about source FACTIVA code i81502 name Trusts/Funds/Financial Vehicles significance prominent onlinesignificance prominent fcode i81502 in ifinal in|ifinal codetype in name Financial Services why lineage source FACTIVA code ifinal fcode ifinal in iinv in|iinv codetype in name Investing/Securities why lineage source FACTIVA code iinv fcode iinv media media-2 media|media-2 responsive layout wrap softcrop Horizontal imphotoid im-131296 location https://images.barrons.com/im-131296/?size=1.5 media media-1 media|media-1 softcrop Horizontal imphotoid im-131296 location https://images.barrons.com/im-131296/?size=1.5 nwchain SB505336665729998540562045860440433109181861 nwchain|SB505336665729998540562045860440433109181861 pe McCarthy pe|McCarthy lastname McCarthy codetype pe displayname McCarthy extractedtext McCarthy source FACTIVA code mccarthy name McCarthy nameformat surname_first pe Sarah McCarthy pe|Sarah McCarthy lastname McCarthy codetype pe displayname McCarthy, Sarah extractedtext Sarah McCarthy source FACTIVA code sarah_mccarthy name Sarah McCarthy firstname Sarah nameformat surname_first relay SYND relay|SYND codetype RELAY name Syndication source EXPANDER value SYND code synd status modified statistic CODES_REVIEWED statistic|CODES_REVIEWED name CODES_REVIEWED value CODES_REVIEWED codetype STATISTIC code CODES_REVIEWED subject BARINVST subject|BARINVST codetype SUBJECT title Investing code BARINVST name Investing canbedisplaysubject true ruleid BARINVST value BARINVST status modified subject BARFUNDS subject|BARFUNDS codetype SUBJECT selectable true title Funds code BARFUNDS name Funds canbedisplaysubject true ruleid BARFUNDS value BARFUNDS status modified wordcount 459 wordcount|459 Photograph by Sergio Souza Active Funds Performed Poorly This Year. And That Could Continue in 2020. Active Funds Performed Poorly This Year. And That Could Continue in 2020. Active Funds Performed Poorly This Year. This Is Why.

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

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.

https://www.barrons.com/articles/quant-funds-are-sticking-with-cheap-stocks-and-theyre-losing-big-51560420900?refsec=factor-investing https://www.barrons.com/articles/apple-united-airlines-and-14-other-value-stocks-that-could-outpace-the-market-51574424010?refsec=factor-investing https://www.barrons.com/articles/momentum-stocks-get-hammered-as-value-makes-a-comeback-51568125963?refsec=factor-investing mailto:evie.liu@barrons.com Active Funds Performed Poorly This Year. And That Could Continue in 2020. By Evie Liu Photograph by Sergio Souza All of the long-only fund groups tracked by Bernstein have underperformed their benchmarks so far this year.

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.