Indexes Beat Stock Pickers 82% of the Time
That was the take-away from a recent, front page story in the Wall Street Journal. A newly published, 15 year study, shows that m
ost actively managed US stock funds were beaten by their own benchmarks.
For the first time, this research report --- known as the S&P Indices Versus Active Funds Scorecard --- included 15 years of data. That length of time is meaningful because it helps smooth out periods of volatility that can affect the performance of active managers.
Active equity managers often argue that they earn their fees during times of increased market volatility when they can skillfully execute trades based on research or expertise.
However, the study's time period includes peaks and troughs in the market and such disruptive events as the Great Recession of 2008-2009, the Brexit vote and Donald Trump's surprise win of the US presidency. Not even the volatility that came with those events was enough to give active fund managers the edge over indexes.
Given the underperformance and excessive fees, it's not hard to understand why investors are turning to index-tracking funds in droves. According to Morningstar Inc. $1.2 trillion has been withdrawn from actively managed US stock funds since the beginning of 2007 and nearly the same amount ($1.1 trillion) has moved into passive US stock funds during the same time period.
This research supports our long-held view at New Market Wealth Management, that active domestic equity managers can't pick stocks well enough to justify the fees they charge, and that even those managers who do outperform their passive counterparts can't sustain it year after year.
