Just counting the number of benchmark-beating funds misses one crucial fact
Time and time again, research into active management over the years has shown that despite their best efforts, stock-picking managers just don’t seem to be able to beat their funds’ benchmarks. But those studies may not offer a balanced comparison.
“An actively managed fund with $30 billion in assets that outperforms its benchmark is far more important than an outperforming active fund with only $30 million in assets,” said Craig Israelsen, associate professor at Brigham Young University (BYU) in Utah, in an article contributed to Barron’s.
To illustrate, he took performance data of three cohorts of mutual funds – U.S. large-cap blend equity, non-U.S. developed markets equity, and intermediate core U.S. bond – and looked at how the proportion of each category’s active fund assets that beat their indexes compares to the proportion of active funds that beat their benchmarks.
Within the U.S. large-cap blend equity fund segment, he said there was US$2.12 trillion held in 145 index funds, compared to US$213 billion in 264 active funds. While 14.5% of index funds had better performance than the SP 500 last year, just 11.2% of index-based assets there outdid the index. On the active side, 27.7% beat the index, but that understates the 37% of active assets that did better than the S&P 500’s 18.4% return.
In the non-U.S. equity blend category, whose best-fit index is the MSCI EAFE Index, he said there were 105 active funds and 81 index-based funds. Of the US$40 billion invested there, 90% was in index-based strategies.
“Among the index funds, 45.7% outperformed—but over 92% of the assets in those funds beat the index,” Israelsen said. And while 46.7% of the actively managed funds bested their index, 58.2% of active fund assets outperformed.
Finally, he said the intermediate core bond family consisted of 66 active funds and 59 index-based funds, which all together represented roughly US$869 billion in assets. While only 59.1% of active funds outstripped the Barclays Aggregate Bond Index’s 7.51% return, nearly 96% of active assets actually generated a return higher than the aggregate bond benchmark.
“The key takeaway is that which active funds beat their respective best-fit indexes makes a difference in our perceptions of how beneficial active management is—or isn’t,” Israelsen said. “It’s a far better bet to track the assets, not just the number of funds.”
