Though actively managed fund results can be alarming, such as this one, they do provide valuable learning opportunities.
“Over the past five years, 84% of large-cap funds generated lower returns than the S&P 500 and 82% were underperforming for 10 years or longer.”
Actively managed funds have somehow managed to survive like bloodthirsty zombies – and even thrive! In April alone, 67% of U.S. assets were invested in active funds!
I’ve written extensively about why active vs. passive investment levels are so lopsided in previous blog posts. Essentially, it comes down to four things.
Employer sponsored retirement plans often lack suitable passive investment options. Unfortunately, marketing and advertising dollars tend to go towards actively managed funds instead of passive funds.
At the center of it all was the White House’s call for expanding the fiduciary standard and financial industry opposition against it.
Human desire to outperform averages is our motivation for choosing actively managed funds over passively managed ones, although we may not have much control over numbers one through three. With actively managed funds possessing expense ratios significantly higher than passive funds (due to paying exorbitant salaries, bonuses and advertising costs), actively managed funds may only make sense as an option when one hopes they may outperform index averages that passive funds seek to match.
However, a recent Morningstar report entitled, The Predictive Power of Fees should dispel those hopes.
“Low-cost U.S. equity funds fared three times better than their higher-cost counterparts, with the least-expensive quintile having a total return success rate of 62% versus 48 for second cheapest quintile and 39 for middle quintile (48 for 2nd cheapest quintile and 30/32%/34% etc)…the pattern was consistent across other asset classes.”
Success ratio = The fund survived and outshone the averages.
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