Active funds show signs of a comeback

Nearly half of active US stock funds outperformed passive counterparts, but a major issue remains unaddressed

Active funds show signs of a comeback

Active funds have been steadily losing ground to passive strategies, to the point that assets in index funds within the U.S. recently exceeded those in active stock funds for the first time. But it’s too soon to sound the death knell for active management altogether.

Citing Morningstar, CNBC has reported that nearly half (48%) of active U.S. stock funds outperformed their passive counterparts over the 12 months through June, as compared to the previously observed 37% year-over-year. The firm drew that conclusion following an analysis of over 4,000 funds with US$12.5 trillion in assets.

Focusing on growth equity funds shows that active mandates are going through their biggest performance rebound, with two thirds (66%) trouncing their passive peers, as compared to 44% last year. Mid- and small-cap growth funds have been notable standouts this year.

“These funds’ larger average market caps relative to many of their indexed peers helped them during a span that was marked by a rout in small caps,” Ben Johnson, director of Global ETF Research at Morningstar, said in a note.

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It’s not all good news for stock-pickers. The research firm also found that approximately half of the most expensive active funds did not survive a continued investor exodus toward low-cost passive products, including ETFs and index mutual funds.

As Steve Deschenes, research and development director of Capital Group, told CNBC: “Active management doesn’t have a skill problem; in most cases it’s a fee problem. The value that it provides in that gross of fees excess performance is in many cases more than taken away by how much active management charges.”

Deschenes maintained that low-fee active funds with high manager ownership tend to provide better performance. Consistent with that assertion, Morningstar reported that the cheapest active funds outperformed more than twice as often as the priciest ones in the past year, while two thirds of the cheapest funds survived.

Active managers that want to narrow the asset gap between themselves and their passive rivals won’t find it easy. While they work to trim their fees and present more competitive price tags to investors, the fee war among index-fund issuers has escalated to the point where prices have reached arguably predatory lows.

But assuming they’re able to deliver good returns amid the continued uncertainty in the markets, offer low-enough fees to avoid negating their performance advantage, and exhibit agility in the event that a bear market or recession comes to pass, then they may still win the hearts and assets of investors.


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