Active mutual funds promise to generate greater alpha, but investors may be better off with index-based exchange traded funds as many active strategies fall short.
According to S&P Capital IQ Fund Research, 80% of running large-cap mutual funds have underperformed the S&P 500 in 2014, reports Jeff Fox for CNBC. [Active Strategies Continue to Lag Passive Index ETFs]
Concerned about the pricier valuations as broad equities keep hitting new record highs, many active managers have gone on the defensive and hedged against a potential correction.
Todd Schoenberger, president of J. Streicher Asset Management, argues that active funds are doing their jobs by allocating more prudently to diminish risk in an aging market rally.
“We’ve gone 35 months without a decline of 10 percent or more, and the median since World War II is 12 months,” Sam Stovall, S&P’s chief equity strategist, said in the article. “Everybody seems to be waiting for that all-elusive correction, when everyone will pile in. But if everybody’s waiting for it, it won’t happen.”
Doug Roberts at Channel Capital Research contends that the extremely loose central bank policies have made it harder for active managers to generate alpha. Ever since the financial crisis, the financial markets and stocks have adopted a risk-on and risk-off mindset, with correlations between assets on the rise.
“Once you have everything going up, it’s really difficult for an active manager to outperform,” Roberts said. “He has to be right on the mark. He has to get into something that not only has good long-term fundamentals but also is at an inflection point. That’s no small task.”
Consequently, investors are voting with their wallets, piling into passive index funds. For instance, ETFs now hold about $1.81 trillion in assets under management, a 20% increase over the past 12 months, outpacing the $15.7 trillion industry’s overall gain of 14.8% over the past 12 months. [Passive ETFs Gain Ground Over Active Funds]
For more information on passive ETFs, visit our indexing category.
Max Chen contributed to this article.