Active Management Mediocrity Continues

Exchange traded products listed in the United States, including exchange traded funds, added just $2.4 billion in new assets last month, according to ETF research firm ETGI. 

Still, net U.S. ETF inflows through the first eight months of the year were $127.5 billion and the U.S. ETF industry is now home to $2.03 trillion in combined assets under management, underscoring not only the industry's rapid growth, but investors' growing preference for passively managed products.

It is something to think about the next time a pundit says “It's a stock picker's market,” advice that endorses active investing, but the reality is 2015 is shaping up to be another year of mediocre performance for active managers. Data from S&P Dow Jones Indices' newly released U.S. S&P Indices Versus Active Funds (SPIVA®) Scorecard confirm as much.

For the 12 months ended July 31, nearly two-thirds of active large-cap managers failed to beat their benchmark, according to S&P Dow Jones Indices. The good news, sort of, for active managers and the investors that stick with this methodology is that the 65.3 percent failure rate of large-cap managers for the year ended July 31 is better than five- and 10-year laggard rates of 81 percent and 80 percent, respectively.

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It is not a leap of faith to infer from that data that, most of the time, investors would be better with low-cost, passive index product, including index ETFs such as the SPDR S&P 500 ETF SPY, iShares Russell 1000 ETF IWB or the Vanguard Total Stock Market ETF VTI. In the case of the Vanguard Total Stock Market ETF, that fund charges a scant 0.05 percent per year, or just $5 per $10,000 invested.

Those thinking that inefficiencies found with small caps would lead to active management being the superior choice would be wrong. For the year ended July 31, 59 percent of active small-cap managers lagged the S&P SmallCap 600. However, that is better than the five- and 10-year laggard rates, which averages 80 percent, according to S&P data.

“It is commonly believed that active management works best in inefficient markets, such as small-cap or emerging markets. This argument is disputed by the findings of this SPIVA report. The majority of small-cap active managers consistently underperformed the benchmark in both the 10-year period and each rolling five-year period since 2002,” said S&P.

The iShares Core S&P Small-Cap ETF IJR, which charges just 0.12 percent per year, has returned nearly 92 percent over the past five years.

To be fair to active managers, there are some areas of strength, namely in the mid-cap space. For the 12 months ended July 31, just 48.2 percent of active mid-cap managers failed to beat the S&P MidCap 400 Index. But, and there's always a “but,” 78 percent of active managers failed to beat the S&P MidCap 400 over five years and 87 percent failed to beat that benchmark over 10 years, according to S&P data.

Perhaps that is why the iShares Core S&P Mid-Cap ETF IJH and the SPDR S&P MidCap 400 ETF MDY have $40 billion in combined assets under management.

“With the exception of emerging market equity funds, funds invested in global, international, and international small-cap equity categories fared better or at par with their respective benchmarks over a one-year period,” adds S&P. “Over the 10-year horizon, managers across all international equity categories were outperformed by their benchmarks.”

Though there are some standouts among actively managed bond funds, including some new ETFs, fixed income is a veritable wasteland of slack performance by active managers. Over the past decade, 93 percent of managers running active long-term government bond funds lagged their benchmarks while just 7 percent of active junk bond managers beat their benchmarks, according to S&P data.