Merrill Lynch released a report to clients last week that finds active managers in the U.S. are performing better relative to their benchmarks than they have at any time in the past six years. Once more the active versus passive argument rears its ugly head.
Is this a fluke or is there something to the latest findings?
According to Merrill Lynch chief equity strategist Savita Subramanian 41% of active large-cap managers are outperforming the Russell 1000 in 2015, the best performance since 2009 when 49% of active managers beat the all-important benchmark. That’s even more impressive when you consider only 19% of managers outperformed the index in 2014.
Here in Canada if advisors compare the performance of the Excel India actively managed Series A mutual fund with the passively managed iShares India Index ETF over the last three years through August 31, they’ll see that the active, more expensive mutual fund actually outperformed the cheaper index ETF by more than 530 basis points – 23.98% vs. 18.68%. If you use the F series it outperforms by an additional 140 basis points.
Passive supporters would suggest both Merrill’s findings and our India example are two isolated incidents that don’t prove the case for active management.
“There is no reasonable doubt that the average active fund MUST lag the average passive fund, since active funds simply cost more,” wrote Burgeonvest Bick Securities Ltd. portfolio manager John De Goey in an email to WP. “There will always be exceptions, but recommending to a client that they pursue a course of action based solely on an unsubstantiated hope that you’ll be able to reliably identify a positive outlier in advance is pretty thin gruel.”
Active proponents will argue that the low-hanging fruit produced by the seven-year bull market has been exhausted; furthermore, passive investors should no longer expect the good times to continue.
“There’s no doubt today’s market is ripe for increased use of actively managed mutual funds,” Mike Hines, president of CPC Advisors in Atlanta, which manages more than $500 million, recently told Financial Advisor IQ magazine. “Still, choosing the right fund that can sustain winning results over time is a real slippery slope.”