Stock-picking fund managers are testing their investors’ patience with some of the worst investment returns in decades.
With bad bets on financial shares, missed opportunities in technology stocks and too much cash on the sidelines, roughly 85 percent of active large-cap stock funds have lagged their benchmark indexes through Nov. 25 this year, according to an analysis by Lipper, a Thomson Reuters research unit. It is likely their worst comparative showing in 30 years, Lipper said.
Some long-term advocates of active management may be turned off by the results, especially considering the funds' higher fees. Through Oct. 31, index stock funds and exchange-traded funds have pulled in $206.2 billion in net deposits.
Actively managed funds, a much larger universe, took in a much smaller $35.6 billion, sharply down from the $162 billion taken in during 2013, their first year of net inflows since 2007.
Jeff Tjornehoj, head of Lipper Americas Research, said investors will have to decide if they have the stomach to stick with active funds in hopes of better results in the future.
“A year like this sorts out what kind of investor you are,” he said.
Even long-time standout managers like Bill Nygren of the $17.8 billion Oakmark Fund and Jason Subotky of the $14.2 billion Yacktman Fund are lagging, at a time when advisers are growing more focused on fees.
The Oakmark fund, which is up 11.82 percent this year through Nov. 25, charges 0.95 percent of assets in annual fees, compared with 0.09 percent for the SPDR S&P 500 exchange traded fund, which mimics the S&P 500 and is up almost 14 percent this year, according to Morningstar. The Yacktman fund is up 10.2 percent over the same period and charges 0.74 percent of assets in annual fees.
The pay-for-active-performance camp argues that talented managers are worth paying for and will beat the market over investment cycles.
Rob Brown, chief investment strategist for United Capital, which has $11 billion under management and keeps about two thirds of its mutual fund holdings in active funds, estimates that good managers can add an extra 1 percent to returns over time compared with an index-only strategy.
Indeed, the top active managers have delivered. For example, $10,000 invested in the Yacktman Fund on Nov. 23, 2004, would have been worth $27,844 on Nov. 25 of this year; the same amount invested in the S&P 500 would be worth $21,649, according to Lipper.
Even so, active funds as a group tend to lag broad market indexes, though this year's underperformance is extreme. In the rout of 2008, when the S&P 500 fell 38 percent, more than half of the active large cap stock funds had declines that were greater than those of their benchmarks, Lipper found. The last time when more than half of active large cap stock managers beat their index was 2009, when the S&P 500 was up 26 percent. That year, 55 percent of these managers beat their benchmarks.
Worst Returns In Decades Hounding Active Stock Fund Managers
December 3, 2014
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Comments
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I will neither defend index investing or using an active mutual fund manager. Both can be part of a client's portfolio. 2014 was a very good year for indexes like the S&P 500 and the QQQ. Active managers who invested too much in energy or commodities failed to match the indexes. That could be different in 2015. There is a conflict of interest problem, however, if you get a commission for putting clients in mutual funds when an index fund would be better or at least a part of your core or supporting portfolio.
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If indexing is so much better than active management then why does Vanguard end up in the 30's out of the 62 fund families that qualify in the Baron's fund performance. That assessment considers all operating expenses and sales charges so NO LOAD funds with low operating expenses would have that additional advantage. In fact, the number one fund company for 2012 was Putnam and Putnam was number 2 for 2013 and for the last 5 years. Some NO LOAD funds end up high in the ratings but the index funds tend to be in the middle. In the case of ETF's since most are synthetic so do not actually own the stocks in the index they would not receive dividends and historically 40% of the return of the S&P index is a result of dividends. Benchmarks don't actually own any stocks so when individual stocks go up or down in price they simply reallocate. Index funds own the stocks so as indexes rebalance if they do not have sufficient cash flow they actually have to sell stocks that went down in price to buy more stocks that went up in price. That is called sell low and buy high.
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Don't you know yet that only in Lake Wobegon can all mutual funds be above average? Running down mutual fund managers in this manner is an old ploy that the financial press and other busy bodies pull out every few years to promote their own agenda.
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There are two reasons that the majority of active managers have underperformed: 1. The comparisons to indexes are apples to oranges, as you describe in your article. I call this situation “peer group classification bias.†2. There are indeed way too many turkeys in the flock of active investment managers. This flock needs to be thinned out. Both of these problems can & should be fixed, as described in my article published in the November 10 issue of Pensions & Investments.
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There they go cherry picking the data again to reinforce the propaganda campaign to malign active fund management. The facts are that the S&P 500 always outperforms when markets are moving up rapidly (2010-2014). During the downturns, the S&P 500 underperforms. All for very logical reasons. Lumping all actively managed funds together to get a statistic is also highly misleading. There have always been plenty of lousy actively managed funds which can be used to pull down the statistical averages. The claim that it is a crap shoot to find a quality, enduring actively managed fund is patently false. It is, and always has been pretty easy to identify quality active management.