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Active Managers Post Their Worst Showing in 10 Years

November 12, 2014

Active managers generally take a bashing during bull markets, when it’s harder to outperform their benchmarks and when investors in passive funds can make money just by sitting back and breathing. But according to the Financial Times, 2014 has been the toughest year in a decade for active fund managers, whose average returns through October were two percentage points below the Russell 1000. That stock index is up 9.6% year-to-date, says the newspaper, citing data from Bank of America.

Among actively managed U.S. large-cap stock funds, 17.7% have outperformed the Russell 1000 so far this year, down from 40.5% in 2013. The poor showing is driving investors into low-cost, passively managed funds, says the FT — and the biggest mutual fund on the planet is Vanguard’s Total Stock Market Index, with $370 billion. ETFs, meanwhile — which are mostly passive — sucked in $199 billion in the first three quarters of 2014. For active managers, “it has been an abysmal year,” the article quotes Bank of America’s U.S. equity chief as saying.

Yet the underperformance is hardly an anomaly. “Since the bank began calculating performance from 2003,” the FT says, “there has only been one year — 2007 — when a majority of active managers beat the market.”

Commenters took the opportunity to engage in a little active-versus-passive debate, a pastime beloved by finance mavens everywhere. Pink-paper columnist John Authers dismissed the suggestion that active managers look shabby only in super-hot markets. “The longer the time period you use, the worse active funds do,” he wrote. But a reader going by the handle MarketFox retorts it’s not fair to tar all active funds with the same brush. If you take out the “closet indexers” — the ones that hew closely to a benchmark — the active group looks a lot better, he or she writes. MarketFox cites research from a 2013 paper suggesting that funds with “high active share,” “portfolios concentrated on the fund manager’s best ideas,” “sensible capacity limits” and certain other characteristics break away from the pack.

By Joan Warner
  • To read the Financial Times article cited in this story, click here if you have a paid subscription.