Active Investor

Even More Bad News for Active Managers

Active Investor

On the heels of this story that we just published regarding the difficult times faced by active managers of large cap funds comes this piece from Reuters which states, “Stock-picking fund managers are testing their investors’ patience with some of the worst investment returns in decades.” The chart below of year-to-date net flows paints a depressing portrait for active fund managers.

Quoting Lipper data, the author (Ross Kerber) states that roughly 85% of active large-cap stock funds have lagged their benchmarks through 11/25/2014, their worst year-to-date returns in 30 years. He attributes this underperformance to “bad bets on financial shares, missed opportunities in technology stocks and too much cash on the sidelines.” Furthermore, as we pointed out in our prior article, since domestic large caps have been the top performer aside from real estate investment trusts, any style drift into foreign or small cap equities would have negatively impacted returns of actively managed large cap funds.

One part of the article that struck a chord with us was the statement from a California wealth adviser that moving $130 million from active large cap funds into passive funds would save his clients about $650,000 in fees per year. This equates to $650,000 of lower revenues for the fund companies, and as this process gets repeated many times over, we are talking about a tectonic shift in the investment industry. Unfortunately, this same adviser said his firm would continue to use active funds for small-cap investing, but as we pointed out in this article, indexing works just as well in the less widely followed asset classes beyond domestic large cap stocks.

One fund mentioned by Kerber with an unusually high cash balance is the Yacktman Fund (YACKX) which now has 17% in cash. One of its managers, Jason Subotky explained this by saying, “Our goal is never to capture every last drop of a roaring bull market.” As of 11/25/2014, YACKX was up 10.2% year-to-date compared to 14% for the S&P 500 Index.

Subotky’s statement reflects one of the commonly proffered claims of active management that it protects investors in bear markets. However, as Kerber pointed out, in the drop of 2008, when the S&P 500 Index lost 27%, more than half of the active large cap stock funds had declines that were greater than those of their benchmarks. This myth was also busted by S&P Dow Jones Indices in their 12/31/2011 SPIVA Report which stated, “In the two true bear markets the SPIVA scorecard has tracked over the last decade, most active equity managers failed to beat their benchmarks.”

We at Index Fund Advisors will continue to follow this story. As we have previously noted, we now have ample evidence that we have reached a tipping point in the migration from active to passive. If you would like to learn more about the benefits of a purely passive investment strategy, please give us a call at 888-643-3133.