Epic Fail: Another Dismal Year for Active Management | ETF Trends

Extending a theme that has received more attention as the exchange traded funds industry has boomed, active managers notched another batch of dismal performances in 2014 despite an almost 14% jump by the S&P 500.

The benchmark U.S. index “had its third straight year of double-digit gains in 2014, returning 13.69% (returns were 32.39% in 2013 and 16% in 2012). Based on data as of Dec. 31, 2014, 86.44% of large-cap fund managers underperformed the benchmark over a one-year period. This figure is equally unfavorable when viewed over longer-term investment horizons. Over 5- and 10-year periods, respectively, 88.65% and 82.07% of large-cap managers failed to deliver incremental returns over the benchmark,” according to note from S&P Dow Jones Indices released earlier Thursday.

While large-cap fund managers proved particularly inept at beating their benchmarks in 2014, investors found little relief from that disappointing trend with mid- and small-cap managers.

“The returns of 66.23% of mid-cap managers and 72.92% of small-cap managers lagged those of the S&P MidCap 400 and the S&P SmallCap 600, respectively, on a one-year basis. Similar to the results in the large-cap space, the overwhelming majority of mid- and small-cap fund managers underperformed their benchmarks over the longer-term horizons as well,” said S&P Dow Jones Indices Senior Director Aye Soe in the note.

The iShares Core S&P Small-Cap ETF (NYSEArca: IJR), which tracks the S&P SmallCap 600, has generated a 9.3% average annualized return over the past 10 years and was up nearly 5% last year. That ETF charges just 0.12% per year. The SPDR S&P MidCap 400 ETF (NYSEArca: MDY) climbed 9.3% last year and charges a modest 0.25% per year. [Leadership From Mid-Cap ETFs]

Actively managed fixed income funds also produced middling results last year.

“A significant majority of the actively managed funds in the longer-term government bond and longer-term, investment-grade corporate bond categories underperformed their benchmarks, while these same categories had shown the largest percentage of outperformance over the one-year period that ended in December 2013,” according to S&P Dow Jones Indices.

The 10-year results for actively managed junk bond funds are disappointing as well as 90% of those ETFs failed to beat their benchmarks over that period, notes S&P Dow Jones Indices.

Ongoing struggles for active managers come as the ETF industry continues to swell in size. While it took nearly two decades for the ETF industry to reach $2 trillion in assets, it will not need nearly as long to get to $5 trillion, according to a new report by PwC. The PwC report says the global ETF industry will reach $5 trillion in combined AUM by 2020. [ETFs: No Stopping at $2 Trillion]

Assets invested in ETFs/ETPs globally reached a new record high of $2.919 trillion at the end of February 2015, according to ETF research firm ETFGI.

To be fair to active management, there are examples of actively managed ETFs that have been either prolific asset gatherers, solid performers or both.

Aided by a recovery in high-yield energy debt this year, AdvisorShares Peritus High Yield ETF (NYSEArca: HYLD) has outperformed its two largest passively managed rivals. TrimTabs Float Shrink ETF (NYSEArca: TTFS), one of the jewels among actively managed equity ETFs, now has over $200 million in assets, a five-star Morningstar rating and a lengthy track record of outperformance.

The PIMCO Enhanced Short Maturity ETF (NYSEArca: MINT) has accumulated nearly $3.6 billion in assets, making it the largest actively managed ETF in the U.S. as investors have sought ETF alternatives to traditional money market accounts and funds.