In my previous article on this evergreen topic of debate for advisors and investors, we’ve analyzed all U.S. Large Cap Blend, Growth and Value mutual funds, along with the most recent – Who Wins the ‘Passive vs. Active’ Institutional Debate? Part 4: US Mid-, Small-Cap Blends — to see who wins the passive versus active debate. (See all the articles in this series on this landing page.)
In this comparison, we’ll venture into the broad Foreign Large Cap – better known as Large Cap International equities. 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 Foreign Large Cap Blend space fare in the debate? My points of fund screening include the following:
- Morningstar Category = Foreign Large Blend
- Equity/Style Box (Long) = Large Blend
- Investment Area = Global Ex United States of America
- Fund Inception Date = < 12/31/1999 (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 25 mutual funds. My data-points screening below indicates that of those 25 funds, only three were Index Funds, and one was an Enhanced Index Fund, leaving 21 actively managed funds.
- Indexed Funds = Yes or No
- Enhanced Indexed Fund = Yes or No
- Total Return Annualized 5 years trailing (Month End 7/31/15)
- Total Return Annualized 10 years trailing (Month End 7/31/15)
- Total Return Annualized 15 years trailing (Month End 7/31/15)
Again, to clarify, I believe 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 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 vs. active funds argument pans out for the Institutional Foreign Large Cap Blend space:
The data seems to show that indexing the Foreign Large Cap Blend space is fairly difficult, as not even one index fund ventured into the top five of returns for any 5-, 10-, or 15-year annualized. Furthermore, with only one index fund getting a top 10 placement at 9th in any category, it still took a beating in the 5-year returns with a -4.84% per year average, compared to the first fund over five years.