Rather than hiring a stock picker to run your investment portfolio, you’re probably better off just investing in market indexes.
That advice has been gaining a lot of traction in recent years, especially as those indexes (at least in the U.S.) have reaped big gains in a bull market that’s now entering its ninth year. But data released this week underscores the idea even more forcefully.
More than six in 10 actively managed stock funds were outperformed by their market benchmarks in 2016, according to the S&P Indices Versus Active funds scorecard. Large-cap funds failed to keep up with the S&P 500 66% of the time, while mid- and small-cap funds were outperformed by their benchmarks 89.3% and 85.5% of the time, respectively.
As bad as those numbers are, they only get worse over longer timelines. The overwhelming majority of all domestic funds were outperformed by their benchmarks over 1-, 3-, 5-, 10-, and 15-year intervals that ended December 2016.
Over the longest span, the numbers were particularly brutal. The S&P 500 outperformed more than 92% of large-cap funds over the last 15 years. Mid- and small-cap funds fared no better over the time period, with their benchmarks besting them 95.4% and 93.2% of the time, respectively. Overall, 82.2% of all active funds were outperformed over the 15-year period. (Over the both short and long term, actively managed bond funds were more likely to beat their benchmarks.)
The companies and money managers who run actively managed mutual funds—and charge fees and management expenses many times higher than those for index funds—have often argued that one-year returns aren’t a fair snapshot of their long-term performance.
Given that long-term analysis is often seen as the best barometer in judging the effectiveness of a stock strategy, since it reduces the impact of volatility, the data appears to back up a growing sentiment among investors that active stock funds may not be worth the cost. Active stock funds, which buy and sell specific stocks based on the fund manager’s determination of how the companies will fare, typically come with high fees, justified by the idea that the clients are paying for acute expertise. But this week’s numbers reinforce the idea that active-management clients may actually just be paying someone to shuffle their investments around, and leaving cash on the table in the process.
As investors have started to become more aware of this notion, passive funds have begun to come in vogue. Passive funds, which follow indexes and don’t try to pick specific stocks to buy and sell, attracted $504.8 billion in investments last year, which is double the level in 2007, according to Morningstar. By comparison, $340.1 billion was pulled out of active funds in 2016, which is 63% more than was withdrawn from active funds in 2008 during the financial crisis.
