I recently had a conversation with Craig Lazzara, Head of Index Investment Strategy at S&P Dow Jones Indices, about his research on dispersion—a factor he believes is very important in explaining the opportunities for active managers. According to Craig, current dispersion readings are quite low, which implies there are fewer opportunities for active managers than usual.
Craig finds there is greater dispersion in mid-cap stocks than large-cap stocks, so the question is: Does this lead to more outperformance for active managers—or just more dispersion between the best and worst managers in the mid-cap category?
As a follow-up to that discussion, I thought it would be interesting to see how active managers had performed against broad indexes over the past decade. I recently looked at small-cap equities, which you can read here, but now I’d like to expand the analysis to mid-cap equities.
There Are Many Ways to Invest
There are numerous ways to invest, but the decision usually starts with whether to invest in either active mutual funds or passive exchange-traded funds (ETFs). Some argue that active managers are best suited to outperform, especially in mid-capitalization stocks, because they think this area tends to be less efficient. Recently, as a result of the broad market rally, these same proponents of active managers have insisted that today’s environment is ripe for active managers to outperform, so I want to take a hard look at the numbers.
In the table below, I compare how some mid-cap indexes have performed against U.S. ETFs and open-end mutual funds in Morningstar’s Mid-Cap Blend category.
Mid-Cap Study (12/31/03–12/31/13)
• Majority of Active Managers Underperform – Over the most recent 10-year period the Russell Midcap Index and the S&P MidCap 400 Index outperformed 81.7% and 87.4%, respectively, of funds in the Morningstar Mid-Cap Blend category. The Russell Midcap also outperformed more than 50% of the Morningstar category in 9 out of the past 10 calendar years, and the S&P MidCap 400 outperformed more than 50% of the category in 7 out of the past 10 calendar years.
• WisdomTree MidCap Earnings Index – WTMEI has outperformed close to 99% of the Morningstar category since its inception.1 I find it impressive that the Index was able to outperform over 75% of the category during the worst calendar year for the category (2008) as well as during the best one (2009).