After years of struggling to beat the index, 2018 should be the year active fund managers earn their spurs.
Market volatility will finally pick up from record low levels, U.S. economic uncertainty will deepen as the expansion becomes the longest in history and the Fed shrinks its balance sheet, and the prospect of at least a 10 percent drawdown finally hitting stocks will increase.
If that's how 2018 plays out—not an unreasonable scenario—macro and market conditions should favor stock-picking "active" management over index-tracking "passive" investment.
At least, that's the theory. And it does look like actively managed funds had a pretty decent 2017, certainly relative to their checkered recent past.
According to Morningstar, active funds' success increased "substantially" in 10 of the 12 categories it tracked in the year ended June 30 compared with the same period a year ago.
About 49 percent of active U.S. stock funds beat their composite passive benchmark in the 12-month period ended June 30, 2017, versus 26 percent for the year ended Dec. 31, 2016, Morningstar said.
The latest findings from S&P Dow Jones Indices show a similar direction of travel. In the 12 months to June this year, 57 percent of large-cap managers, 61 percent of mid-cap managers and 60 percent of small-cap managers underperformed the S&P 500, the S&P MidCap 400, and the S&P SmallCap 600, respectively.
That doesn't sound great. But it's a clear improvement on the last five years when 82 percent of large-cap managers, 87 percent of mid-cap managers and 94 percent of small-cap managers all underperformed their respective benchmarks.
Over the last 15 years the scale of underperformance is even greater: 93 percent, 94 percent and 94 percent, respectively.
That 15-year span includes two of the biggest drawdowns in Wall Street history in 2002 and 2008, two periods when index-tracking funds beat the active fund manager, S&P Dow Jones Indices figures show.