Over the trailing decade, the gross returns on actively managed large-company U.S. stock funds, before paying official fund expenses but after accounting for trading costs, have been competitive with those of index funds, says John Rekenthaler, vice president for research at Morningstar, in a recent online opinion piece. The problem for active funds, he adds, is not tied to their investment decisions but to management fees and, to a lesser extent, taxes their strategies incur.
But how will these active funds fare if trends of the past two decades continue? A review of 20 years’ worth of data by Morningstar’s head of global manager research, Jeff Ptak, used rolling seven-year time periods and compared active category totals to investment-style indexes through late 2014; while a different study done by Rekenthaler ran through November 2015.
“Happily, though, they [tell] the same general story: Among the three large-company categories, active large-value managers had higher gross returns than the index in both studies. Active managements’ gross returns for the other two categories hovered around those of the indexes,” the Morningstar columnist said.
Taking a closer look at Ptak’s 10-year figures for large-company stock funds vs. those of 15 and 20 years, the research shows that active management’s results for large-value funds have improved. However, they have “slumped for the other two categories of blue-chip U.S. stock funds,” Rekenthaler adds.
Over 20 years, relative gross returns for active large-blend funds were positive. Furthermore, the outperformance by active large-growth funds made them “fully competitive with index funds even after expenses,” he explains.
Gross returns for six mid- and small-cap categories “stomped those of the comparison indexes for 20 years, with an average annual victory of more than 100 basis points for mid-cap funds, and 250 points for small-company funds,” the Morningstar research manager says.
However, Rekenthaler points out, the victory margin “has shrunk over the more recent decade, such that only active small-value funds have been able to beat the indexes after paying expenses.”