Active fund managers have often claimed that they significantly outperform passive strategies in volatile markets. With 2021 and 2020 being among the most volatile years for the stock market, one would expect active investing strategies to quickly outperform their passive counterparts. But recent data from Morningstar and S&P Global have shown that active fund managers still perform worse.
Morningstar, the American financial services, analysed nearly 3,000 funds and found that only 47 percent managed to outperform passive indexed strategies.
“Roughly half beat, and half lagged. It was what you would expect from a coin flip,” said Ben Johnson, director of global ETF research and the author of the Morningstar Active/Passive Barometer report.
S&P Dow Jones Indices report also had similar findings. Only 42 percent of large-cap funds, 24 percent mid-cap funds and 22 percent of small-cap funds managed to beat or equal the S&P 500, S&P MidCap 400 and S&P SmallCap 600 indices, respectively.
The performance of fund managers with active strategies only gets worse over longer periods of time. Over a 10-year long period, only 25 percent of active fund managers were able to beat the market, according to the Morningstone report.
The situation is even worse for large-cap funds, where only 11 percent of active funds outperform their passive counterparts over a period of 10 years.
While it has been known for a while that most investors are not able to choose stocks that consistently outperform the market, it was believed that fund managers are better able to navigate volatility. Countless years of research have suggested that it is not possible to market, a theory known as the efficient market hypothesis. The efficient market hypothesis (EMH), alternatively known as the efficient market theory, is a hypothesis that states that stock prices are a reflection of all information and consistent alpha (excess returns) generation is impossible.
But the presence of individuals of Warren Buffet, Peter Lynch, Benjamin Graham, Sir John Templeton and others have shown that the hypothesis falls short of being a universal rule due to their success at consistently beating the market through long periods of activity.
Newer research has also shown that it should be possible to beat the market, even though the highly competitive market where large institutions employ hundreds of algorithms and analysts make it very hard.
The takeaway from the Morningstar and S&P reports? It is perhaps better to invest money with passive fund managers and if one chooses an active manager then it is best to choose the cheapest one. The cheapest funds are twice as successful when compared to the priciest ones over the 10-year period ended June 30, 2021.
(Edited by : Anshul)
First Published: Nov 2, 2021 3:35 PM IST
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