The market may be having a banner year, but the same can’t be said for most mutual fund managers.
About 85 percent of actively managed, large-cap stock funds lagged their benchmark indexes as of Nov. 25, making it the worst year for active managers in 30 years, according to Lipper, a Thomson Reuters research unit.
“Bad bets, missed opportunities and too much cash have weighed on manager performance,” Jack Ablin, chief investment officer at BMO Private Bank wrote in a note to clients, also citing “few discernable trends that managers could have latched onto.”
Investors are starting to take note: Since their introduction in the mid-1970s, passively managed index funds (and more recently exchange-traded funds) have become more popular as they regularly outperform actively managed funds and typically carry substantially lower fees.
Through October 31, index funds and ETFs saw more than $206 billion in net deposits, while actively managed funds brought in just $35.6 billion.
That also reflects a shift in 401(k) plans, as companies increasingly move away from all active fund options from which workers can choose. Nearly 80 percent of companies offer a mix of active and passive options to workers, with 10 percent offering just passive investments.
While the skill of fund managers has increased, more competition has made it difficult for any single fund to consistently beat the market, professors at the Chicago Booth School of Business and the Wharton School at the University of Pennsylvania concluded in a paper released this summer. “As more money chases opportunities to outperform, prices move, making such opportunities more elusive.”
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