For years, the average actively managed mutual fund has underperformed the market, but the industry is not dead, just evolving, according to Tom Rampulla, managing director of Vanguard’s Financial Advisor Services division.
Speaking at the Inside ETFs 2017 conference in Hollywood, Florida, Rampulla explained that Vanguard’s low-cost actively managed mutual funds have returned 1.21% annually above their benchmarks over five years, 0.83% over 10 years and 1.11% over 15 years. The funds have an expense ratio of 28 basis points.
Adjusting those returns for more typical higher expense ratios charged by the average actively managed funds, however, wipes out most if not all of those profits so that the five-year return drops to 0.11% and 10-year and 15-year returns drop to -0.51% and –0.02%, respectively.
“Costs really do matter,” said Rampulla. Investing in funds with low expenses and low turnover provides “more of what you don’t pay for,” as opposed to more expensive funds with higher turnover, which provide less of what investors pay for.
Actively managed funds have to “overcome all expenses for distribution and higher turnover just to break even with the market,” said Rampulla.
He explained that investors paid $437 billion to active managers over the past decade and underperformed the benchmark indexes by $545 billion, giving up essentially $1 trillion over 10 years.
Beyond costs is the increased competition and professionalism among active managers plus the easy availability of information due to technology.