U.S. investors have all but tuned out the boldest and best mutual fund stock pickers, leaving billions of dollars on the table for each of the past five years.
Stung by the 2008 financial crisis, mutual fund investors have plunged into low-cost, low-risk passive investments such as index funds, happy to take whatever the market gives them instead of reaching for excess returns.
But the opportunity cost has been enormous.
An easy way to look at it is to compare rival mutual fund titans Vanguard Group, the reigning champion of the index fund, and Fidelity Investments, whose actively managed portfolios have outperformed benchmarks for the past five years.
Vanguard received $75 billion in net flows in 2013 - more than three times any other firm - while Fidelity had only $5 billion in net flows, lagging about half of the 35 largest fund families, according to Morningstar Inc.
"The Vanguard tsunami leaves all of us a smaller player," said Art Steinmetz, who oversees $232 billion in assets as president of OppenheimerFunds. "You can't do it more cheaply than Vanguard with their scale... Year in and year out, they have every day low prices and they don't have to apologize for performance," he said.
The price tag for playing it safe becomes clearer when you drill deeper into the numbers: The average actively managed stock fund at Fidelity has outperformed its benchmark by 1.33 percentage points, net of fees, each year since 2008. That has resulted in $35 billion worth of added value, or outperformance, for Fidelity's investors, said Brian Hogan, president of Fidelity's Equity Group who oversees $750 billion worth of actively managed stock funds.
Hogan holds up Joel Tillinghast, portfolio manager of the $48 billion Fidelity Low-Priced Stock Fund, as one of Fidelity's ultimate active stock pickers. Over the past 24 years, Tillinghast has outperformed his benchmark by 5 percentage points a year after fees.
But investors are not stampeding into Tillinghast's fund to access his returns. In fact, over the past five years, investors have pulled nearly $3 billion from the fund in outflows, according to Lipper Inc, a Thomson Reuters company.
Christopher Philips, a senior investment analyst at Vanguard, said a lot of money managers are trying to move away from the poor marketing image of no skills and high fees by becoming more active. But he also said there's no guarantee portfolio managers with high active share can beat their benchmarks year after year.