Recent Goldman Sachs analysis points to large-cap core funds in the U.S. seriously underperforming the S&P 500 in 2015 with only 27% beating the index in a year where stock pickers were supposed to be in the driver’s seat suggesting active management is ready for the trash bin.
Apparently active managers missed out on the two biggest performers in the S&P 500 – Netflix and Amazon -- which were up 140% and 120% respectively as of December 30. About the only winner for mutual fund managers was Alphabet which was up 45% through the penultimate day of December.
WP reached out to Ottawa advisor Ben Felix who’s with PWL Capital for his reaction to the news about active management.
touches on something interesting that is often overlooked when considering active managers, but was highlighted in this
recent academic paper: Active managers have the job of correctly selecting the securities in a market that will do better than the benchmark index, but we know empirically that index returns tend to be driven by a small number of stocks in the index,” wrote Felix. “The high probability of missing the top performing stocks is a major hurdle for active managers; engaging in stock selection disproportionately increases the chance of underperformance relative to the chance of outperformance. So, even before fees are considered, the odds are not in favour of active management.”
In the U.S. mutual fund outflows took a beating with $177 billion exiting according to Bank of America Merrill Lynch while $199 billion in inflows headed over to global equity ETFs. While ETFs at $2.1 trillion are much smaller than the $13.2 trillion in mutual funds (excluding money market funds), the fact ETF assets grew 11.3% year-over-year suggests active management’s best days could be behind it.
So, is this another nail in the coffin for active management?
“I wouldn’t say that this is a nail in the coffin for active management; there will always be investors that want to beat the market badly enough to accept active risk,” said Felix. “Investors do need to understand that when they engage an active manager with the hopes of outperforming the market, their chances of underperformance are greater than their chances of outperformance.”
Advisors be warned.