Money Managers Are Punished by a Runaway S&P 500

The surging U.S. stock market is a problem for money managers, and relief can’t come soon enough.

The S&P 500 Index has reclaimed its pre-coronavirus peak and is notching fresh records almost daily, yet few managers are celebrating. Sure, the money they oversee is growing, but not fast enough for investors aching to keep up with a runaway U.S. stock market.

The market rally, and the fear of missing out it arouses, is disrupting the delicate balance managers must strike between protecting money and growing it. Managers safeguard the money entrusted to them by spreading their bets. But when the U.S. stock market surges, it tends to be the only bet investors care about. And that’s when diversification can quickly take a backseat to chasing the market.

Building guardrails around a portfolio isn’t free, but the cost has historically been bearable. A traditional diversified portfolio made up of 60% U.S. stocks and 40% long-term bonds blended equally between government and corporate debt has generated 9% a year since 1926, including dividends. That’s 1.2 percentage points a year less than the S&P 500, but with roughly a third less volatility, a common measure of risk.

Stiff Competition

The explosion in new investments in recent decades promised to further reduce the cost of protection. Money managers can now assemble portfolios in a dizzying number of combinations by reaching for foreign stocks and bonds, hedge funds or private assets— and all in a variety of investing styles. And most have. Today’s portfolios are far more diversified than a traditional 60/40 one, which in theory should produce similar or higher returns with less risk.