The start of a new calendar year is always an exciting time for us, as it allows us to exam how well our own portfolios have performed during the previous year, along with bringing us a wealth of other interesting data. One set of data we particularly look forward to is the analysis of active fund manager performance vs an index benchmark. According to data provided by Bank of America only 19% of large-cap mutual fund managers beat their respective benchmarks in 2016. This figure is much worse than 2015, where 41% manage to successfully justify their management fees. Active Fund Managers Perform in 2016
The funds tracked were split into two broad styles; growth funds which aim to purchase stocks who have above-average price increases, and value funds, which focus on steadier price performances and securities that pay higher dividend yields.
Interestingly (and for us unsurprisingly) only 7% of growth funds managed to beat their benchmarks of the Russell 1000 growth index which returned 7% for the year. Value funds proved to be much more successful, with 22% of them beating the Russell 1000 value indexes return of 17% for the year. Active Fund Managers Perform in 2016
Active managers’ disappointing performance comes at a time when investors are shifting into less costly exchange traded funds that track indices. Financial websites have been littered with articles since the beginning of the year about how active funds didn’t perform because of their cost structures and the huge shift of passive investing into ETFs. Blackrock sold a record $140bn of ETFs in 2016 and PwC predict the ETF market to reach $7 in the next 5 years.
But what do these figures mean for the stock pickers, should we just buy an ETF and relax?
Our belief is that the answer to this is no. The issue with actively managed mutual funds is not the ability of fund managers to pick the best stocks, but the costs that surround doing it. Hiring the brightest brains, renting high end offices, regulatory and legal fees etc all add up – and these rapidly eat away the funds’ net gain. The current trend towards ETFs is based on their super low cost structure (something like 0.1% a year in fees).
Yet with ETFs you get the good along with the bad (as well as different weighting approaches). Performing analysis of individual securities will lead to better returns, particularly because the only overheads are the brokerage and custodian fees.