The Performance of Active Managers Keeps Getting Worse

The Performance of Active Managers Keeps Getting Worse

Years ago John Bogle once quipped, “If the data do not prove that indexing wins, well, the data are wrong. ” Here’s the latest: There’s no need to second guess Bogle on this particular matter because a) the data proves indexing wins, and b) the data is completely right.

The table below shows the 1, 3, 5, and 10-year performance of actively managed mutual funds in multiple equity categories against dumb brainless indexes. Allow me to highlight a few notable trends.

First, the underperformance by equity managers is has occurred during both favorable and unfavorable markets. The typical argument is that active managers “protect” shareholders during a market crash because they don’t have to be fully invested like an index ETF. However, even with this alleged handicap, the performance of “fully-invested” index ETFs has thoroughly whipped active managers.

(Audio) Talking ETFs with Author Eric Balchunas  + a $477,000 Portfolio Report Card

Second, the vast majority (more than 50%) of actively managed mutual funds in all categories are underperforming during all recorded periods – 1, 3, 5, and 10-years. And while it’s true there are a few equity categories with outliers, like U.S. large cap growth (NYSEARCA:VUG), U.S. large cap value (NYSEARCA:VTV), and U.S. small cap value (NYSEARCA:VBR), the performance discrepancies favoring active managers are far too small and short-lived to declare a convincing victory.

The other notable and alarming trend is how the collective performance of active managers gets progressively worse over longer-term horizons.

For example, Standard & Poor’s data shows that 74.81% of all domestic U.S. stock funds failed to beat the S&P Composite 1500 (NYSEARCA:ITOT) in 2015, while 80.85% failed to do it over a three-year period and whopping 83.18% failed during a 10-year period. The same trend of worsening performance is occurring in most other equity categories too.

Fast forward to now. Have money managers suddenly improved?

CNBC just reported that “Stock pickers had their worst quarter EVER.” How bad has it been? It’s been “history-making bad,” according to the journalists, with fewer than 1 in 5 large cap mutual funds beating the S&P 500 (NYSEARCA:IVV).

SP 2015 Report1

Regardless of the facts, misinformed mutual fund salespeople will still try to sell you the propaganda they know the identity of which tiny percentage of actively managed funds will outperform in the future. The truth is they don’t know and neither do the wonderful charts of historical performance they’re schmoozing you with.  Why? Because accurately predicting which managers will outperform in the future is a total crap shoot. And that crap shoot is further increased by the sales loads attached to the funds they want to sell you. And besides that, today’s hotshots are tomorrow’s turkeys. (See David Einhorn, William Ackman, John Paulson, and the long-list of ex-wonder kids.)

The main point I want to convey is this: The proper and only context for actively managed funds of any sort is inside a person’s non-core investment portfolio. The non-core is higher risk and always smaller in size compared to a person’s core portfolio.

Among the $125 million in Portfolio Report Cards I’ve done thus far, I have yet to analyze and grade a portfolio with active funds being used for its core or foundation that have achieved satisfactory scores. If this describes your portfolio, please come forward because I want to dissect the evidence.

In the end, the debate of active vs. passive management is officially dead. And it will be that way, until the collective performance of active managers stops getting worse.

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3 comments on “The Performance of Active Managers Keeps Getting Worse
  1. Robert McGraw says:

    I had subscribed to your podcast “the index investing show” and noticed there are no longer any new episodes. Is it dead or do you still plan on doing them. I always enjoyed your portfolio reviews though we differ on the necessity of commodities so I would never get an A. Also since REITs are present in cap weighted indexes so I don’t see the need for a specific REIT fund. I do miss your podcasts.

  2. Ronald Delegge says:

    Hi Robert,

    My weekly podcasts are available at iTunes or SoundCloud. Make sure you subscribe to the RSS feed so whenever a new show is posted, you’ll get it. Also, as a long-time listener, please let us (and others) know what you think about the show @ iTunes.



    Yes, the S&P 500 now includes REITs and XLRE is the ticker of the Sector SPDR ETF tracking just the REITs inside the S&P 500.

    Still, domestic stock indexes lack broad global exposure to real estate. This is an essential ingredient inside a person’s core portfolio. Check out ticker REET, which currently charges 0.14% to get the trick done. Although RWO is older and has a larger asset base, REET achieves the same exposures and has an annual ER that’s 3.5x less expensive. Take that savings and go buy the grandchildren an extra scoop of ice-cream.

    Check out my online courses for more portfolio building tips:

    May the markets be with you!

  3. Error says:

    The negative impact of industry size on performance is especially large for funds that have higher turnover and volatility as well as for small-cap funds. Funds that are aggressive in their trading, as well as funds that trade illiquid assets, will see their high trading costs reap smaller profits when competing in a more crowded industry, Pastor, Stambaugh, and Taylor find.

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