Passive Assets Surpass Active in U.S. Large Caps


The most congested category in U.S. asset-management just got even more contested. A new analysis shows that in large-cap stocks, index-based fund assets moved past those held by active managers in 2018.

Using updated Morningstar data, Bloomberg is reporting that at the end of 2018, passive funds -- including mutual funds, ETFs and smart-beta (i.e., factor-based) funds -- held $2.93 trillion in large-cap stock assets.

By comparison, actively managed rivals had $2.84 trillion at the end of the fourth quarter. "If stock-pickers are becoming an endangered species, this may be the latest sign," Bloomberg notes.

The report points out active management's lead in assets has been narrowing for years across categories as "investors pour money into low-fee index funds while higher-cost stock-pickers struggle to consistently beat markets."

Last year, passively managed funds attracted a net $458 billion of investment money. Meanwhile, actively managed funds had $301 billion of net outflow for the year, just shy of 2016's high-water mark of $320 billion. Morningstar also estimates that at the start of 2019, stock index funds and ETFs controlled nearly $3.6 trillion in assets. That brought such passively run investment vehicles within striking distance of actively managed funds' total of $3.77 trillion. 

Combined with longer-term investment fund flow trends, Bloomberg's analysis observes that "passive funds tracking U.S. stocks of all sizes could pass up their active rivals this year."

The news about rising passive stock fund assets comes on the heels of Morningstar's latest "Active/Passive Barometer" report.

The research series, which tracks U.S. active fund managers' performance against their passive peers by asset class, came out with its latest measurements earlier this month. In order to breakdown success rates of active vs. index-based funds, the Barometer benchmarks returns on a net-of-fees basis.  

The updated Barometer doesn't find much in the way of changing patterns of performance from past years. Key results include:

  • Some 62% of U.S.-based passive stock funds outperformed their average active peer in 2018, up from 54% a year earlier. 
  • The biggest challenge in active stock picking success last year came in value-styled stock funds. About 74% of passive funds were listed by Morningstar as beating the average active value fund in 2018.
  • In the past 10 years through 2018, funds with lower costs as compared to their broad category averages succeeded about twice as often as their higher-priced rivals.            

Cost factors are credited by Morningstar as a major advantage for passive funds. This study also suggests that a wide range of higher expenses associated with paying up for active management presents a major performance hurdle for investors over time.     

The Active/Passive Barometer benchmarks such results by 17 stock asset-classes and styles. But not enough active funds had track records for Morningstar to accurately analyze across all of those categories over 15 and 20 years. In fact, this report found return information for active managers in all categories only going back 10 years or less. 

A wealth of independent academic research indicates that at least 30 years worth of returns are needed to be considered as a large enough sample to draw conclusions. In addition, academics state that the larger the data set, the more confidence investors can have in any conclusions. 

But given what information is available from surviving active managers, just six equity groups tracked by Morningstar had enough active management data to compare 20-years of returns to respective indexing competitors: large-blend, large-value, mid-blend, small-blend, real estate and foreign large-blend. 

Some 80.3% of U.S. large-cap stock blend index funds outperformed their active large-cap competitors from 1998 through 2018, according to the Active/Passive Barometer. In that same period, the study finds 91.6% of domestic large-value passive funds were able to find success against their active rivals. The same pattern developed in the other four categories studied with 20 years worth of return data. 

"In general, actively managed funds have failed to survive and beat their benchmarks, especially over longer time horizons," Morningstar's analysts summarize.  

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