US small cap stocks significantly underperformed large cap stocks by -6.2 per cent in 2018, generally hampering strategies that incorporate more of an equal weighting of securities versus their capitalisation-weighted indexes, according to Wilshire Consulting’s 2018 Active Management Review.
The ninth annual report, which provides an analysis of active management in traditional asset classes, outlines a study of systematic returns and the underlying factors driving market returns over the last ten years, and also details a review of active management results within various segments of the equity and fixed income markets.
According to the report US value stocks underperformed growth by -2.3 per cent in 2018, building on their significant negative relative performance of a year earlier. ‘Lower quality’ stocks meanwhile outperformed ‘high quality’ stocks in 2018 with the Quality factor posting a -1.6 per cent return.
The Volatility factor had a negative return during the year (-3.4 per cent) in 2018, which generally served as a tailwind to support strategies that prefer low volatility stocks, while the Momentum factor experienced strong positive returns (+3.2 per cent), benefiting strategies that attempt to ride momentum trades.
Emerging markets stocks slightly underperformed developed markets (+0.8 per cent net) in 2018, providing little systematic differentiation to international managers with persistent tilts towards emerging markets, while general US Dollar strength in 2018 detracted 3.5 per cent from the US Dollar-based returns of international equities relative to local returns.
High yield bonds meanwhile, trailed the core fixed income market (-2.1 per cent net), assisting the relative returns of managers who lean towards bonds of higher credit quality.