US stocks: New dawn for active?

Written by: Global Thought Leadership | March 03, 2017
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Source: Bloomberg, eVestment and Legg Mason, as of 2/27/17. Past performance is no guarantee of future results. Please note that an investor cannot invest directly in an index. Unmanaged index returns do not reflect any fees, expenses or sales charges. This information is provided for illustrative purposes only and does not reflect the performance of an actual investment.

The Bottom Line

  • There are times when stocks tend to move in lockstep—and others when they tend to behave quite differently from one another.
  • One easy way to get a sense of this is to look at the average “cross-correlation” between sectors.1
  • Recently that statistic for the S&P 500 has dropped sharply—in part reflecting changes in perceptions about the prospects for various industries under Trump’s policy regime.
  • That could be a positive sign for active equity managers—since lower correlations allow for greater differentiation between equity returns—which in turn create more opportunities for active managers to select stocks with attractive relative valuations.
  • The last time the S&P 500 average sector cross-correlation was this low, a period of active outperformance versus passive had begun—as shown in a multi-year analysis of active and passive large-cap stock returns by eVestment Alliance.
  • The eVestment analysis showed a period of passive large-cap outperformance for the years 1994-1999, a period of active outperformance for the years 2000-2009 and another period of passive outperformance for the years 2010-2015.
  • Another recent study by Royce & Associates specific to small-cap stocks also highlights an interesting cyclical nature to active management. Royce found that when small-cap value outperforms small-cap growth—something that has started to happen in the last year or so—then actively managed small-cap solutions tend to outperform passive strategies.  
  • Whether we are moving into a new environment that could favor active managers for a period of time remains to be seen, but recognizing that a cyclical pattern of performance may well exist is a good reminder that it’s wise to have exposure to both active and passive solutions in  your equity mix.


1 The S&P 500 average sector cross correlation was determined by calculating the correlation of each sector to the others and then taking an average of all the cross-sector correlations.



IMPORTANT INFORMATION: All investments involve risk, including loss of principal. Past performance is no guarantee of future results. An investor cannot invest directly in an index. Unmanaged index returns do not reflect any fees, expenses or sales charges.

Equity securities are subject to price fluctuation and possible loss of principal. Fixed-income securities involve interest rate, credit, inflation and reinvestment risks; and possible loss of principal. As interest rates rise, the value of fixed income securities falls. International investments are subject to special risks including currency fluctuations, social, economic and political uncertainties, which could increase volatility. These risks are magnified in emerging markets.

The opinions and views expressed herein are not intended to be relied upon as a prediction or forecast of actual future events or performance, guarantee of future results, recommendations or advice.  Statements made in this material are not intended as buy or sell recommendations of any securities. Forward-looking statements are subject to uncertainties that could cause actual developments and results to differ materially from the expectations expressed. This information has been prepared from sources believed reliable but the accuracy and completeness of the information cannot be guaranteed. Information and opinions expressed by either Legg Mason or its affiliates are current as at the date indicated, are subject to change without notice, and do not  take into account the particular investment objectives, financial situation or needs of individual investors.

Active management does not ensure gains or protect against market declines.

Forecasts are inherently limited and should not be relied upon as indicators of actual or future performance.

Investments in small-cap and mid-cap companies involve a higher degree of risk and volatility than investments in larger, more established companies.

Outperformance does not imply positive results.