Market Update 16th March 2026

No time for losers

My long list of things to worry about was unnecessarily added to last week by SPIVA – the S&P Indices Versus Active score card was released and caused its annual bout of anguish, self-doubt and soul searching.

SPIVA typically generates headlines along the lines that few active managers can consistently outperform an index over time. Or as I see it someone I have never met publishes a report once a year that says I am basically pointless. I don’t know what S&P Global thinks I have done to them.

Before we get into it, I’m just going to leave it out there that the report is written by the extremely famous index provider, marking its own homework.

They cover many regions, but I will illustrate the findings from US active managers.

Over 15 years, just 10% of active funds have outperformed the US index. Over 10 years it is 14%, over 5 years it is 11%, over 3 years it is 33% and over 1 year it is 21%.

They also publish a “persistence scorecard” – what are the chances of a successful fund staying successful? Here again the results are not encouraging to begin with. Firstly, they take it over three consecutive twelve month periods. In the case of specifically large cap US equities, the number of funds staying in the top quartile 3 calendar years in a row (out of 176 at the beginning of the period) is literally zero and in the other categories it is very small.

They flex the numbers a bit. They extend the period to five consecutive years in the top quartile, and the score is zero across the board. They make it a bit easier and count funds staying in the top half of the peer group and they get low single digit percentages, and we are statistically unlikely to hit these numbers. Not just me personally of course, but the industry as a whole.

You might have noticed the longer-term numbers I started with jump around. The percentage of funds outperforming doesn’t increase in line with the time periods. We have had an astonishingly eventful few years in financial markets.

Covid and its aftermath led to several distinct market phases. Very few equity funds outperformed their index consecutively in 2020, 2021, and 2022 for example. Still reeling from this we had Russia invade Ukraine, causing a large increase in energy pricing leading to a generational increase in inflation, in turn leading to an abrupt interest rate cycle following years of almost 0% interest rates. AI came along, many equity markets have been at all-time highs, Trump reappeared for a second time, introduced unprecedented tariff levels and has now invaded Venezuela and started a full-scale war in the Middle East.

But none of this seems surprising to me. I don’t think we would realistically expect to be in the top quartile in multiple consecutive periods, and neither would most of the underlying funds. Yes, the numbers are low but that is one reason we aren’t really trying to do this. We are of course looking to do it over a longer period.

SPIVA looks at this as well and here the numbers start to look more promising. In the US they take the performance of a sample of 470 funds – the total US peer group including large, mid and small cap funds – and show their persistence over a five year period – something closer to what we and the funds themselves are trying to do.

This shows 48% of top quartile funds at the beginning of the period stayed in either the first or second quartile over the following five years – slightly less than half but if we can apply some kind of skillset then I would rate our chances.

More striking though are the ones at the bottom. You sometimes hear of people “bottom fishing” – looking at the bottom of the league tables to find tomorrow’s winners, an out of favour fund which is primed to turn this around.

However, the SPIVA numbers show just 2% of fourth quartile funds at the start of the period are in the top quartile over the following five years. 71% are either still in the fourth quartile or SPIVA also count merged or liquidated funds and style changes. These last two account for 54% of the 71% but I am taking them as a proxy for some undesirable outcome and the management company attempts to retain the assets in some way. Here I feel we also have a chance, but these more achievable numbers over more realistic timeframes don’t seem to make the headlines.

Avoiding losers is at least as important as finding winners and we see this everywhere.

One of the key investment themes of the year so far – and we haven’t even got to the end of the first quarter yet – has been the stark underperformance of software stocks. As a group they are now widely believed to be losing out to AI. Software is no longer a tool to help you, like say Excel, or Rightmove and AI is increasingly going to do it for you instead. As software does it for you, then fewer people are needed in the office and the per person, recurring monthly revenue model that previously made these stocks attractive is under threat.

Whether all this is true or not remains to be seen, but this is the argument. We saw not one but two of the specialist technology funds we cover during the week. Both are underweight software, both have one or two carefully chosen software stocks they think will benefit from AI, and both have the same mantra. In AI it is important to avoid losers.

Following the launch and rapid adoption of AI applications such as ChatGPT during 2023, there would be news reports counting the number of times a CEO managed to say “AI” during an earnings call and the stock would go up and this would be news. It’s fair to say this period of indiscriminate feverishness has long since passed and again it’s closely related to the timeframe of quarterly earnings in contrast to a much longer period to properly assess where we are.

Robert Fullerton – Senior Research Analyst

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