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Who Wins ‘Passive vs. Active’ Institutional Debate? Pt. 3: U.S. Large Cap Value

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My last two articles (Who Wins ‘Passive vs. Active’ Institutional Debate? Pt. 1: U.S. Large Cap Blend, and Who Wins ‘Passive vs. Active’ Institutional Debate? Pt. 2: U.S. Large Cap Growth) hit on two of the three asset classes in the U.S. large cap arena – blend and growth. (See all the articles on this topic of which mutual fund categories are most receptive to an active versus passive investing approach.)

Both provided what I humbly consider to be some interesting findings–and provide true apples-to-apples comparisons–on the hugely debated subject of who wins the passive versus active management debate in the institutional investment space (i.e., the advisor space).

In this article, we’re going to round out the U.S. large cap space by analyzing the Value slice. 

Let me remind you that I’m using Morningstar Direct as my source of screening, testing and research on return/expense data points.  

So how does the U.S. large cap value space fare in the debate? My points of fund screening include the following:

    • Morningstar Category = Large Value
    • Equity/Style Box (Long) = Large Value
    • Investment Area = United States of America
    • Fund Inception Date = < 12/31/1999 (I use this to get a true picture of a 15-year return period comparison, as anything shorter than 10 years can, I believe, easily be misinterpreted.)
    • Fund Share Class = Institutional Only

The results of the data search provided a total of 47 mutual funds. My datapoints screening below indicates that of those 47 funds, only one was an index fund, and none was an enhanced index fund, leaving 46 actively managed funds:

    • Indexed Funds = Yes or No
    • Enhanced Indexed Fund = Yes or No
    • Total Return Annualized 5 years trailing (Month End 4/30/15)
    • Total Return Annualized 10 years trailing (Month End 4/30/15)
    • Total Return Annualized 15 years trailing (Month End 4/30/15)

Again, 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 or 12b-1 fees and other costs taken out of the fund’s assets, and doesn’t include sales loads or redemptions fees. Of course, institutional share class funds generally have no sales loads; so therefore, I think we can assume the 5-, 10- and 15-year returns analyzed to be true total NET returns.  

The following chart examines how well the passive versus active funds argument pans out for the institutional U.S. large cap value space:

5-Year Returns

10-Year Returns

15-Year Returns

# of Index Funds in top 10 funds of Return

ZERO

ZERO

ZERO

# of Index Funds in top 20 funds of Return

ZERO

ZERO

ZERO

# of Index Funds in top 40 funds of Return

1 index fund ranking 21st

1 index fund ranking 24th

1 index fund ranking 39th

Highest Annualized Returning Fund

16.993%

9.630%

9.189%

Highest Annualized Return (Index Fund)

13.424% = 21st

7.631% = 24th

5.815% = 39th

   
   

In conclusion, the data seems to show that indexing the large cap value space is similar to the large cap growth space and “not very desirable for indexing.” With only one index fund in the sample, it took quite a beating in most all categories; however, it did maintain a better return over 10 years, compared to the 23 actively managed funds in the bottom half; yet over 15 years, it only outperformed eight of the actively managed funds.

As such, based on my analysis of the data above, I believe the institutional U.S. large cap value space fares better with active rather than passive management. Stay tuned – more is still coming to inform this debate of great interest to advisors.