There’s little to celebrate this New Years for active fund managers who fell well short of index funds and ETFs in 2015. Ubiquitous industry presence Tom Lydon, president of Global Trends Investments, breaks down the bad news.
“Many expected this to be the year that active mutual fund managers would be able to pick and choose their battles and generate alpha for investors,” Lydon explains in his latest EFT Trends analysis. “However, active managers continued to underperform benchmarks, bolstering the case for low-cost, passive index-based exchange traded funds.
He cites Goldman Sachs research that found only 27 percent of large-cap core funds beat the S&P 500, which was also below the 10-year average of 36 percent.
Meanwhile, he adds that S&P 500 index-related ETFs, including the SPDR S&P 500 ETF, iShares Core S&P 500 ETF and Vanguard 500 Index, gained about 1.9% this year.
“Weighing on active managers’ portfolios, most stock pickers under-allocated to many of the stocks that experienced the biggest gains,” Lydon concludes. “For instance, fund managers missed out on Netflix and Amazon, the two best performing components of the S&P 500.
Read Lydon’s full analysis here.
With more than 20 years serving financial markets, John Sullivan is the former editor-in-chief of Investment Advisor magazine and retirement editor of ThinkAdvisor.com. Sullivan is also the former editor of Boomer Market Advisor and Bank Advisor magazines, and has a background in the insurance and investment industries in addition to his journalism roots.
I am wondering if anybody has taken the necessary time to exclude all ridiculously high fee mutual funds (or even all with expense ratios above average) and redo the analysis. My sense is that the results would look much better. Any large cap fund with an expense ratio over 1% should be highly suspect in this day and age. Investors aren’t quite there yet, but they are learning rapidly that managers can outperform as long as the expense ratios aren’t too egregious. Both you and I know that the only reason some of those high cost funds get sold is because there is a big, fat load associated with it. Those are going away little by little.
American Funds, Glenmede, Ivy International, Wasatch all had no trouble beating benchmarks. Even Vanguard admits that their actively managed funds have outperformed over the long haul for two reasons: (1) low fees. (2) Consistency of process. In a severe down market, I like the active manager’s chances even better due to typically a slight value tilt and residual cash on hand.
Also the study was on “large cap core” a down the middle slice. I doubt very seriously, that this year that “indexing” alone will be the only answer to alpha!