A basis point here, a basis point there, and pretty soon you’re talking real money.
And, typically, investors seeking to squeeze out basis points are looking to passive index funds as their product of choice.
Enter Fidelity Investments with new research presenting the case that investors would do well to set their gaze instead on large active funds…like those of Fidelity, for example.
In truth, the idea is not a new one. American Funds — another large actively managed fund group — has promoted very similar research reaching the same conclusion.
Investors would be prudent to familiarize themselves with the idea in order to make the appropriate mental adjustments — particularly to the shopworn idea that large active funds are too big to succeed.
The new research by Fidelity chief investment officer Tim Cohen and his investment research colleagues Darby Nielson, Brian Leite and Andy Browder confronts that prejudice at the outset.
It posits that many investors — not knowing how to select a winning active fund — figure that choosing a passive fund that will track a benchmark is a no-brainer way to obtain market performance.
Given the huge trend toward indexing, via mutual funds and ETFs, Fidelity was wise to address this elephant in the room.
Indeed, one might assume that the underlying purpose of its research — besides showing investors the conditions under which active outperforms passive — is to provide an easy and intuitive means for investors to select active funds rather than take that no-brainer path that increasingly leads investors to passive funds.
To that end, the Fidelity analysts go right to the crux of the active vs. passive debate — specifically, to the arena of U.S. large-cap stocks.
That category is widely assumed to be the most fairly priced segment of the efficient market, where it is harder to capture excess return.
In contrast, the authors of the report cite data showing that the average active fund easily outperformed passive funds over the past two decades in the less efficient areas of international large-cap and U.S. small-cap equity funds.
But the aggregate data concerning U.S. large-cap funds shows that active funds underperform their passive cousins on average. So the question, as the research paper formulates it, is:
“Is the ‘average’ active fund noted in general studies of active and passive investing truly relevant to the typical investor? Or would investors be able to narrow down the selection using some basic filters?