Passive Investors Can Relax: It's Another Bad Year For Stockpicking Funds

Passive Investors Can Relax: It's Another Bad Year For Stockpicking Funds

over 3 years ago2 mins

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The majority of actively managed investment funds once again failed to outperform passive equivalents over the past year – but there are some specific areas where stockpicking has delivered the goods 👃

What does this mean?

New data from index provider Standard & Poor’s this week made painful reading for active investment managers – those who put clients’ cash in individual stocks, bonds, and so on. A biannual performance report shows that, as of June 30th this year, 63% of funds invested in large US stocks actually delivered worse returns than the benchmark S&P 500 index over the previous 12 months after taking fees into account.

That figure rises to a whopping 78% when looking at performance over the past five years. Across the pond, meanwhile, 71% of stockpickers underperformed the S&P Europe 350 index of the continent’s biggest stocks in the past year, rising to 78% in the past five. And things are even more extreme when it comes to bond funds: 92% of those investing in long-term US Treasuries failed to beat the Barclays Long Government index over the past year, and 96% since 2015 🙀

Simply buying an exchange-traded fund (ETF) tracking the equivalent index has been investors’ best bet in two thirds of US stock categories recently. But not all: a small majority of funds focused on American “mid-cap” and “small-cap” stocks managed to beat their benchmarks’ performance – and across all sizes of segment, the vast majority of active managers focused on “growth” stocks as well as real estate investment trusts (REITs) came out on top.

US investment sectors sorted by best recent active outperformance (Source: SPIVA)
US investment sectors sorted by best recent active outperformance (Source: SPIVA)

Why should I care?

The report’s findings are perhaps unsurprising: active investment trading will always create winners and losers, and intense competition makes it difficult to consistently beat the market. ETFs’ comparative cheapness is also a significant factor in their outperformance. Nevertheless, passive investing’s inexorable rise – the approach now accounts for around half of all US fund investment, up from 20% in 2009 – looks set to continue.

That’s especially true since active managers have historically claimed to do well during the sort of market volatility seen in the first half of 2020. Their outperformance was, however, largely limited to smaller market segments whose benchmarks suffered the biggest losses. And in the long term, even recent successes in areas such as real estate and growth fall away (see our Pack on Investment Styles for more on the latter): 92% of large-cap growth, 74% of mid-cap growth, and 75% of small-cap growth funds failed to beat the market as measured over the past 15 years.

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The moral? There may be money to be made picking certain stocks in the short term – but for most investors, passive is perfect 👌

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