Large cap funds have the worst record in maintaining top-quartile performance. A mere 1.19% of the 252 large cap funds S&P analysed managed to finish in the top-quartile each time during the three-year period. A lot more funds naturally managed to maintain a top-half ranking over the same timeframe, but this still amounted to only one in five funds in the large cap space. Small cap funds fared only slightly better with a score of 25%.
The graph below shows that the difficulty fund managers have to stay in the top-quartile is not due to the stiff competition they face from other managers. Rather on the contrary: active managers as a whole have been consistently underperforming index trackers, by a margin that’s surprisingly high over a 4-year period, and which is growing steadily.
An active retreat
So how have these telling numbers impacted fund flows into US equities during the research period? Fund selectors across Europe keep telling us they have a hard time finding active managers in the US equity space that they believe can consistently outperform their index. Consequently, they say, most or all of their clients’ money is invested in passive vehicles in this asset class.
A look at Morningstar’s fund flows data shows that they have indeed been doing so. While active funds received the benefit of doubt until mid-2014, since then investors have been switching from active to passive investing. From June 2014 until September 2015, they withdrew a net €11.4bn from active US equity funds, while adding net €6.4bn to their ETF holdings.
So active US equity funds are obviously stuck between a rock and a hard place. Of course there remain exceptions, but in general they are in bad shape, and bleeding. In the coming weeks we will follow S&P’s example by taking a closer look at the shape of active management in other asset classes. Stay tuned!