Actively managed funds outperformed their passively managed counterparts on average during the first half of 2020, but this performance is far from a strong endorsement of higher-cost active management, according to Morningstar Inc. analyst Ben Johnson .
âThe whole notion of a stock picking market is fictional, and it falls into the same category as Santa Claus and the Easter Bunny,â Johnson said, referring to claims that the volatility of the stock market. this year is playing in the hands of active managers.
Morningstar research showing that 51% of active funds beat their average index in the first six months of 2020 is interpreted as a victory that is both narrow and nuanced.
âThe story often conveyed by many active managers is that they’re sort of in a better position to add value, but this research shows that story doesn’t hold up,â Johnson said. âMathematics alone would show that half would do better and half would do worse than a clue. “
From a universe of nearly 4,400 funds representing approximately $ 13.1 trillion in assets, or roughly 66% of the U.S. fund market, Morningstar found that only 48% of U.S. equity funds exceeded the average passive index of peers, while 60% of foreign equity funds beat their benchmarks.
When performance is separated into Morningstar’s 20 fund categories, the picture becomes clearer: Active management alpha is more prevalent as strategies move off the beaten track.
Only 35% of US large-cap blended funds, for example, outperformed their benchmarks during the study period, compared to 72% of European equity funds that outperformed their benchmarks.
The US and global real estate fund categories were the strongest actively managed categories, with over 80% of these active funds beating their benchmarks.
Active fixed income funds have generally lagged in the six-month period through June 30, with just 40% of core, corporate and high yield mid-bond funds beating their benchmarks. .
The Federal Reserve’s monetary policy has led to historically low interest rates, presenting a unique challenge for bond fund managers, said Todd Rosenbluth, director of mutual fund and ETF research at CFRA.
âActive bond funds struggled because taking credit risk against the index was not rewarded,â said Rosenbluth. “Investors were more comfortable and stayed more with active bonds despite cheaper competition, and when volatility increased, active investors lost.”
Paul Schatz, president of Heritage Capital, agreed that it takes a special type of fixed income manager to navigate today’s bond market.
âI am not at all surprised by the results as it appears that there are a handful of very good active fund managers and the rest have continued to position themselves for the end of the 40 year bond bull market which hurts returns, âhe said. âPlus, in fixed income, with a much narrower range of returns than in stocks, fees hurt even more. “
The fund’s expense ratios are a general factor. While Morningstar calculated benchmark performance net of fees for the most accurate performance comparisons, it found that over the 10-year period through June 30, the cheapest funds beat their benchmarks around twice as often as the most expensive funds.
Over this period, the cheapest funds beat their benchmarks 34% of the time, compared to 16% for the more expensive funds.
âSince investors can choose bond funds based on the S&P 500 and Bloomberg Barclays Aggregate almost free of charge, investors should be rewarded for paying a premium,â Rosenbluth said. âThe best funds are those with a strong track record and low fees, as these are a key factor in future performance success. “
The takeaway from Johnson is that short-term market volatility is a poor indicator of a fund’s long-term performance potential.
âWhat you see in these short-term numbers is a lot of noise,â he said. âAdding value as an active manager is a difficult task, so if you want to pass judgment on active management it has to be done over a longer period of time. “
For reprint and license requests for this article, click here