Who Wins the ‘Passive vs. Active’ Institutional Debate? Part 4: US Mid-, Small-Cap Blends

In my first three articles in this series on whether passive versus active strategies perform better by mutual fund categories , we hit on the broad U.S. Large-Cap arena—Blend, Growth and Value. All three provided some interesting findings on the hugely debated subject matter relative to the institutional investment space. In this article, we’re going to round out the U.S. core equity investing space by analyzing both the Mid-Cap Blend and Small-Cap Blend. 

Again—keep in mind, I’m using Morningstar Direct as my source of screening, testing and research on return/expense data points.  

So how does the U.S. Mid-Cap Blend space fare in the debate? My points of fund screening include the following:

  • Morningstar Category : Mid-Cap Blend
  • Equity/Style Box (Long): Mid-Cap Blend
  • Investment Area: United States
  • Fund Inception Date: Earlier than Dec. 31, 1999 (For a true picture of a 15-year return period comparison, as anything shorter than 10 years, I believe, can easily be misinterpreted.)
  • Fund Share Class: Institutional Only

The screening results of the data search provided a total of 12 mutual funds—a very limited amount in the institutional category above, which surprised me quite a bit. My further screening below indicates that of those 12 funds, only three were index funds, and only one was an enhanced index fund, leaving eight actively managed funds.

  • Indexed Funds: Yes or No
  • Enhanced Indexed Fund: Yes or No
  • Total Return Annualized five years trailing (month end April 30, 2015)
  • Total Return Annualized 10 years trailing (month end April 30, 2015)
  • Total Return Annualized 15 years trailing (month end April 30, 2015)

To clarify, I think it’s important to define one data point used above. Morningstar defines its “total return annualized” as a return net of any management, administrative, 12b-1 fees and other costs taken out of the fund’s assets, and doesn’t include sales loads or redemption fees. Of course, institutional share class funds generally have no sales loads; therefore, I think we can assume the 5-, 10- and 15-year returns analyzed to be true total net returns.  

The following table examines how well the passive versus active funds argument pans out for the Institutional U.S. Mid-Cap Blend space:

 

MID-CAP BLEND

5-Year Returns

10-Year Returns

15-Year Returns

No. of Index Funds in Top 5 funds of Return

Three total, including one as enhanced index

Three total, with none as enhanced index

One total, with none as enhanced index

No. of Index Funds in Top 10 funds of Return

Four total, including one as enhanced index

Four total, including one as enhanced index

Four total, including one as enhanced index

Highest Annualized Returning Fund

14.959%

10.266%

11.742%

Highest Annualized Return (Index Fund)

14.069% = Second

10.266% = First

8.982% = Fifth

Highest Annualized Return (Active Fund)

14.959% = First

10.023% =Fourth

11.742% = First

 

So with Mid-Cap Blend above, how does the U.S. Small-Cap Blend space fare in the debate? My points of fund screening include the following:

  • Morningstar Category: Small-Cap Blend
  • Equity/Style Box (Long): Small-Cap Blend
  • Investment Area: United States
  • Fund Inception Date: Earlier than Dec. 31, 1999 (For a true picture of a 15-year return period comparison, as anything shorter than 10 years, I believe, can easily be misinterpreted.)
  • Fund Share Class: Institutional Only

The results of the data search provided a total of 29 mutual funds. My further screening below indicates that of those 29, only three were index funds and one was an enhanced index fund, leaving 25 actively managed funds.

  • Indexed Funds: Yes or No
  • Enhanced Indexed Fund: Yes or No
  • Total Return Annualized five years trailing (month end April 30, 2015)
  • Total Return Annualized 10 years trailing (month end April 30, 2015)
  • Total Return Annualized 15 years trailing (month end April 30, 2015)

The following chart examines how well the passive versus active funds argument pans out for the Institutional U.S. Small-Cap Blend space:

SMALL-CAP BLEND

5-Year Returns

10-Year Returns

15-Year Returns

No. of Index Funds in Top 10 funds of Return

Two total, with none as enhanced index

Two total, with none as enhanced index

One total, with none as enhanced index

No. of Index Funds in Top 20 funds of Return

Four total, including one as enhanced index

Three total, with none as enhanced index

Three total, including one as enhanced index

Highest Annualized Returning Fund

16.986%

10.627%

13.033%

Highest Annualized Return (Index Fund)

14.443% = Fifth

10.438% = Fourth

9.802% = Eighth

Highest Annualized Return (Active Fund)

16.986% = First

10.627% = First

13.033% = First

 

In conclusion, the data show that the Mid-Cap Blend space seems to be somewhat “undesirable for active management,” as there are only eight active funds in the whole sample. Indexing here ranked second and first in the five-year and 10-year returns, but as assumed over a 15-year period, indexing dropped a few notches to fifth in returns, which is still somewhat strong in a 12-fund sample.

 As for the Small-Cap Blend space, the desire for indexing is slightly less, with only four funds in the total sample of 29. The best index fund in each 5-, 10- and 15-year category did pretty well, with a fifth, fourth and eighth place ranking. However, active funds consistently performed first in all three categories, as well as wedging a larger gap in return difference between the best actively managed fund and the best index-based fund. 

Therefore, based on my analysis of the data above, I believe the Institutional U.S. Mid-Cap Blend space fares better with indexing rather than active management, even though the 15-year numbers still win with active. On the other hand, Small-Cap Blend runs a relatively slight edge toward active management, especially over the 15-year span, with an excess of 3% returns per annum.

Stay tuned—there’s more to come.

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