The State of SMA's

Where do SMA's stand in Q1 and Q2 2024?

There is a common perception in the investment world that active managers have an advantage over passive managers during times of increased volatility, since active managers can go on the defensive, whereas passive managers have strict mandates to mimic an index.

After an extended time period (2012 – 2019) where equity volatility, measured by the CBOE VIX index, traded below its 20-year average of 20.1, volatility increased during the peak of the pandemic. After a bout of low volatility in 2021, volatility surged above its 20-year average in 2022. However, equity volatility fell below its 20-year average and remained there throughout the first quarter (figure 1).

Despite the ongoing uncertainties about monetary policies and the pace of monetary easing, the S&P 500 index posted a +10.56% return during the quarter, which corresponds to the fall in volatility. With the lower volatility and strong equity market performance, let’s take a look at how actively managed separately managed accounts (SMA) fared against their passively managed counterparts during the quarter.

As you can see in the Zephyr graph below, U.S. actively managed equity SMAs fared well during the quarter. The mid-cap growth and small-cap growth styles were the only equity styles that saw an advantage for passive SMAs, albeit a small advantage, with just under 50% of the active managers beating their respective benchmarks.

As for the large-cap space, which tends to be a more efficient investment style, making it harder to find consistently outperforming active managers. During the first quarter large-cap actively managed SMAs held their own, as about half of all active SMAs beat the respective style benchmark across all three styles. Large core and large growth managers fared the best with slightly more than 50% of active managers beating the benchmark.

As many may expect, the biggest winners came from the small-cap styles. Over 75% of active small-cap value SMAs beat the Russell 2000 Value index, which wasn’t an extremely tough hurdle as the index posted a +2.9% return. Meanwhile, roughly 70% of active small-cap core SMAs beat the Russell 2000 index, which was a slightly tougher hurdle as the index posted a +5.18% return.

The pace of market moves has increased over the years, which makes it important to strive to create diversified asset allocation strategies that can withstand the different financial market dynamics and changing investment landscape. It’s also important to note that research shows there are some equity styles that tend to benefit active management over passive management. When building an investment portfolio, it’s prudent to take an inclusive view rather than an exclusive view of the active versus passive debate.

PSN Asset Flows in Q2 2024

Zephyr’s PSN[BS1] [KS2]  SMA database collects AUM data for thousands of managed account strategies each quarter.  This data is broken out into several account types which represent the investor group of each account holder.  It is common for strategies to manage assets for several different account classifications including Institutional or High Net Worth, Managed Account (WRAP), or Mutual Funds.  The PSN asset flow calculations take into account strategy performance to separate new assets from asset growth due to performance.

Total Asset Flow observations

Fixed income continues to dominate overall SMA asset flows with the top asset flows for Q2 2024 and YTD all in Fixed Income Universes.   We see a slight discrepancy in the most recent quarter as PSN All Cap Growth and PSN Small-Mid Core Universes broke into the top 5 with asset flows of $7.71 billion and $5.56 billion, however these universes are only up .63 and .47 billion respectively for the year.  Both universes have positive returns for the year with 19.9% and 2.35% YTD.  Fixed Income returns have been slightly negative for most universes. Despite this, assets continue to flow into this asset class. 

Institutional or High Net Worth Separate Account Assets

Institutional and High Net Worth asset flows largely mirrored total assets and predominantly flowed into the Fixed Income Universes.  The PSN All/Variable Maturity Universe saw the largest gain with $28 billion flowing into the universe for the second quarter and $69.4 billion for 2024.  While not the largest cash flow, the PSN Microcap Universe saw the largest yearly percentage change in AUM with 16% growth for the year. 

Managed Account (WRAP) Assets

Flows for Wrap Assets deviated significantly from Institutional assets reported and were all equity universes.  PSN US Equity Universe saw flows increase by $32 billion in the most recent quarter and $27 billion year-to-date.  This could be an indication that more agile investment accounts are making their way into the equity market where returns have maintained at reasonably high levels throughout the last several years.

Review the PSN Mid-Year Outlook on Zephyr’s partner page for more information.