Advocates for passive investing have some convincing new data for why their strategy is best.
Over the past year, an overwhelming majority of active managers—for both stock and fixed-income portfolios—have underperformed their benchmarks, according to S&P Dow Jones Indices, news that could affirm the shift toward passive investing that the market has witnessed in recent years.
Active funds—in which the components are selected by an individual or team of experts, rather than being pegged to track a certain benchmark—have come under increased scrutiny in recent years, with many market participants pointing out that most actively managed funds tend to underperform and that management fees further erode returns.
As a result, passive funds have drawn heavy investor inflows. For example, active funds saw outflows of $223.1 billion while passive funds saw inflows of $418.6 billion in 2015, according to data from Morningstar.
Flows into passive, or index funds as they are sometimes referred, have continued in 2016, with passive funds seeing net inflows of $286.1 billion, while active funds have seen outflows of $149.8 billion.
Drilling deeper into 2016 performance for the year ended June 30, 84.6% of active managers in the U.S. large-cap equity space underperformed the S&P 500 /zigman2/quotes/210599714/realtime SPX -2.01% . While the benchmark index rose 3.99% over that period, large-cap funds fell an average of 0.38%, according to data provided by S&P Dow Jones Indices.
The results were even worse for midcap and small-cap stocks, which are generally more volatile than their large-cap peers. About 88% of U.S. equity midcap managers underperformed the S&P Midcap 400 /zigman2/quotes/219506813/composite MID -2.90% , while nearly 89% of small-cap equity managers underperformed the S&P SmallCap 600 index /zigman2/quotes/210599868/delayed SML -1.52% . The scale of the underperformance also was greater in these categories: while the S&P Midcap 400 rose 1.3% over the year, the equivalent active funds fell 5.2%. The S&P SmallCap 600 was essentially flat, while the small-cap funds lost 7.21%.
While June 30, the end date to the S&P analysis, was a time marked by heavy volatility due to the U.K.’s vote to leave the European Union, there is even less outperformance by active managers on a longer-time horizon. Over a five-year period, nearly 92% of large-cap managers underperformed, while 87.9% of midcap managers did. A mere 2.42% of small-cap managers outperformed their benchmark index over a five-year period.
Similar results were seen in the fixed-income space, where 94.39% of investment-grade bond funds were outperformed by their benchmark over the past year. More than 93% of funds that were invested in government bonds underperformed, while 86.15% of global income funds also failed to beat their benchmark.