A new report from Goldman Sachs suggests active management could be ready for the trash bin. The investment bank’s analysis of large-cap core funds in the US found that they seriously underperformed the S&P 500 in 2015 – only 27% beat the index in a year where stock pickers were supposed to be in the driver’s seat.
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 end of the year.
WP reached out to Ottawa advisor Ben Felix with PWL Capital for his reaction to the news about active management.
“This article touches on something interesting that is often overlooked when considering active managers: 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,” Felix says. “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 US, mutual fund outflows took a beating; $177 billion exited, according to Bank of America Merrill Lynch, while $199 billion in inflows headed over to global equity ETFs. ETFs, currently around $2.1 trillion, are still much smaller than the $13.2 trillion in mutual funds (excluding money market funds), but the fact that ETF assets grew 11.3% year-over-year suggests active management’s best days could be behind it. But don’t count active managers out just yet – though Felix warns investors to proceed with caution.
“I wouldn’t say that this is a nail in the coffin for active management; there will always be investors who want to beat the market badly enough to accept active risk,” he says. “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.”