Institutions do better than individuals at active fund management, but given that both come out losers the underlying message is that picking stocks and bonds is a game neither group should play.
The vast majority of all mutual fund and institutional accounts failed to keep pace with their benchmarks over the past decade, according to a new report from S&P Dow Jones Indices examining the impact of fees.
And while institutional accounts, owned by large and deep-pocketed investors with formal selection processes, usually performed better than their mutual fund peers, the difference is almost always not because their managers are better. Instead, institutions are better at negotiating lower fees.
In other words, and we have learned this before, active fund management is a fool’s errand. Institutional accounts did better, but it was all a little like the old joke in which the man frequents a restaurant because “the food is terrible, but the portions are large".
Unless you are an active mutual fund investor, in which case your terrible food is a bit more expensive.
The report examined the impact of fees on mutual fund and institutional account performance over the past decade, using data from the University of Chicago and eVestment Alliance.
“Across various categories within the domestic equity space, the overwhelming majority of active managers, both retail and institutional, lagged their respective benchmarks,” according to the report.
“Overall findings suggest that on a gross- or net-of-fees basis, the U.S. equity space poses meaningful challenges for active managers to overcome.”
"Meaningful challenge" is somewhere between kind and a massive understatement.
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Among large-cap equity mandates benchmarked to the S&P 500, 85 per cent of mutual funds underperformed the market over 10 years after fees are deducted, as well as 80 per cent of institutional accounts. Looking at the same category gross of fees mutual funds bested institutions slightly, in that only 68 per cent of them failed to match market return over 10 years, as compared to 69 per cent of institutional accounts.
This illustrates both that institutions are better positioned to drive a hard bargain, but for a service which is effectively giving them what they deserve good and hard.
Wait, I can almost hear the active managers say, “you are cherry-picking data”.
“If only,” I can only ruefully reply.
Net of fees 95 per cent of large-cap growth mutual funds and 90 per cent of institutional accounts lagged. The same statistics for mid-cap core funds were 98 and 95 per cent, respectively. My sense of fairness impels me to tell you that in only one of the 17 categories of domestic equities did active mutual funds outperform, and that is large-cap value funds, where only 47 per cent failed to keep pace with their benchmark, gross of fees. Take fees into account, of course, and that number grows to 64 per cent.
There was not a single domestic equity category over the past 10 years in which investors would have been better off holding the typical mutual fund or institutional account. Not one.
But wait, our active manager friend chimes in, “domestic equity is a commodity, look at international and emerging markets, that’s where we add value". OK, let’s.
International small-cap equity is as close as it gets, but here too, while 48 and 50 per cent of mutual and institutional accounts beat their benchmark over a decade, this is only gross of fees. More than 60 per cent in both cases underperform when fees are counted. As for emerging markets funds, 86 per cent of mutual funds don’t match the index over our 10 years, nor do 79 per cent of institutional accounts.
In fixed income, comparisons between mutual funds and institutional accounts can’t be made as easily on an apples-to-apples basis, but the overall message is the same. While many more fixed income managers beat their index on a gross basis, the majority still do not when you take into account fees.
For example, a creditable 48 per cent of emerging market debt mutual funds lag their benchmark before fees, but that rises to a regrettable 76 per cent after fees. The best the industry can do in fixed income mutual funds is in investment-grade intermediate funds, where only 59 per cent lag. Not much of an advertisement.
Institutions paid a good bit less in fees for their fixed income active management but also got the same market-lagging performance.
While passive investing may possibly be, as Sanford Bernstein analysts put it recently “worse than Marxism,” active management, as shown in the S&P report, is socialism for fund managers.
James Saft is a columnist for Reuters
MO
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Mountain%20Boy
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Test
Director: S Sashikanth
Cast: Nayanthara, Siddharth, Meera Jasmine, R Madhavan
Star rating: 2/5
North Pole stats
Distance covered: 160km
Temperature: -40°C
Weight of equipment: 45kg
Altitude (metres above sea level): 0
Terrain: Ice rock
South Pole stats
Distance covered: 130km
Temperature: -50°C
Weight of equipment: 50kg
Altitude (metres above sea level): 3,300
Terrain: Flat ice
Race card
5pm: Maiden (PA) Dh80,000 1,600m
5.30pm: Maiden (PA) Dh80,000 1,600m
6pm: Arabian Triple Crown Round-2 Group 3 (PA) Dh300,000 2,200m
6.30pm: Liwa Oaisi Group 2 (PA) Dh300,000 1,400m
7pm: Wathba Stallions Cup Handicap (PA) Dh70,000 1,600m
7.30pm: Handicap (TB) Dh100,000 1,600m
The National selections: 5pm: Flit Al Maury, 5.30pm: Sadah, 6pm: RB Seqondtonone, 6.30pm: RB Money To Burn, 7pm: SS Jalmood, 7.30pm: Dalaalaat
Europe’s rearming plan
- Suspend strict budget rules to allow member countries to step up defence spending
- Create new "instrument" providing €150 billion of loans to member countries for defence investment
- Use the existing EU budget to direct more funds towards defence-related investment
- Engage the bloc's European Investment Bank to drop limits on lending to defence firms
- Create a savings and investments union to help companies access capital
The specs
Engine: 4.0-litre flat-six
Torque: 450Nm at 6,100rpm
Transmission: 7-speed PDK auto or 6-speed manual
Fuel economy, combined: 13.8L/100km
On sale: Available to order now
Formula Middle East Calendar (Formula Regional and Formula 4)
Round 1: January 17-19, Yas Marina Circuit – Abu Dhabi
Round 2: January 22-23, Yas Marina Circuit – Abu Dhabi
Round 3: February 7-9, Dubai Autodrome – Dubai
Round 4: February 14-16, Yas Marina Circuit – Abu Dhabi
Round 5: February 25-27, Jeddah Corniche Circuit – Saudi Arabia
COMPANY PROFILE
Name: HyperSpace
Started: 2020
Founders: Alexander Heller, Rama Allen and Desi Gonzalez
Based: Dubai, UAE
Sector: Entertainment
Number of staff: 210
Investment raised: $75 million from investors including Galaxy Interactive, Riyadh Season, Sega Ventures and Apis Venture Partners
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Killing of Qassem Suleimani
How much sugar is in chocolate Easter eggs?
- The 169g Crunchie egg has 15.9g of sugar per 25g serving, working out at around 107g of sugar per egg
- The 190g Maltesers Teasers egg contains 58g of sugar per 100g for the egg and 19.6g of sugar in each of the two Teasers bars that come with it
- The 188g Smarties egg has 113g of sugar per egg and 22.8g in the tube of Smarties it contains
- The Milky Bar white chocolate Egg Hunt Pack contains eight eggs at 7.7g of sugar per egg
- The Cadbury Creme Egg contains 26g of sugar per 40g egg
At a glance
Global events: Much of the UK’s economic woes were blamed on “increased global uncertainty”, which can be interpreted as the economic impact of the Ukraine war and the uncertainty over Donald Trump’s tariffs.
Growth forecasts: Cut for 2025 from 2 per cent to 1 per cent. The OBR watchdog also estimated inflation will average 3.2 per cent this year
Welfare: Universal credit health element cut by 50 per cent and frozen for new claimants, building on cuts to the disability and incapacity bill set out earlier this month
Spending cuts: Overall day-to day-spending across government cut by £6.1bn in 2029-30
Tax evasion: Steps to crack down on tax evasion to raise “£6.5bn per year” for the public purse
Defence: New high-tech weaponry, upgrading HM Naval Base in Portsmouth
Housing: Housebuilding to reach its highest in 40 years, with planning reforms helping generate an extra £3.4bn for public finances
Real estate tokenisation project
Dubai launched the pilot phase of its real estate tokenisation project last month.
The initiative focuses on converting real estate assets into digital tokens recorded on blockchain technology and helps in streamlining the process of buying, selling and investing, the Dubai Land Department said.
Dubai’s real estate tokenisation market is projected to reach Dh60 billion ($16.33 billion) by 2033, representing 7 per cent of the emirate’s total property transactions, according to the DLD.
THE SPECS
Engine: 6.75-litre twin-turbocharged V12 petrol engine
Power: 420kW
Torque: 780Nm
Transmission: 8-speed automatic
Price: From Dh1,350,000
On sale: Available for preorder now
FIXTURES
December 28
Stan Wawrinka v Pablo Carreno Busta, 5pm
Milos Raonic v Dominic Thiem, no earlier then 7pm
December 29 - semi-finals
Rafael Nadal v Stan Wawrinka / Pablo Carreno Busta, 5pm
Novak Djokovic v Milos Raonic / Dominic Thiem, no earlier then 7pm
December 30
3rd/4th place play-off, 5pm
Final, 7pm
Key facilities
- Olympic-size swimming pool with a split bulkhead for multi-use configurations, including water polo and 50m/25m training lanes
- Premier League-standard football pitch
- 400m Olympic running track
- NBA-spec basketball court with auditorium
- 600-seat auditorium
- Spaces for historical and cultural exploration
- An elevated football field that doubles as a helipad
- Specialist robotics and science laboratories
- AR and VR-enabled learning centres
- Disruption Lab and Research Centre for developing entrepreneurial skills
Tuesday's fixtures
Kyrgyzstan v Qatar, 5.45pm
Skewed figures
In the village of Mevagissey in southwest England the housing stock has doubled in the last century while the number of residents is half the historic high. The village's Neighbourhood Development Plan states that 26% of homes are holiday retreats. Prices are high, averaging around £300,000, £50,000 more than the Cornish average of £250,000. The local average wage is £15,458.
NO OTHER LAND
Director: Basel Adra, Yuval Abraham, Rachel Szor, Hamdan Ballal
Stars: Basel Adra, Yuval Abraham
Rating: 3.5/5
