This is the most brutally honest sell side report we have seen in ages.  Eric N. Berg, CPA,  Bulent Ozcan, CFA, Kenneth S. Lee cover asset managers at RBC Capital. The analysts have conducted a study on the performance of many money managers and come to the conclusion that they are making the same bad mistakes this year. We took out some excerpts from the report, and it should provide some comfort to the hedge fund industry amid recent criticism.

A refreshed and greatly expanded study by RBC Capital Markets Asset Management Research into the performance of active asset managers has reached what we think is an important conclusion: Many managers appear to be setting themselves up for another year of underperformance The study, the same as a study we published in April but based on manager results through May as opposed to through February and based on 465 asset managers’ results as opposed to 112, found that asset managers who underperformed their benchmarks in 2012 were running their portfolios in 2013 in pretty much the same way they ran those portfolios in 2012—with essentially the same number of stocks and with actually a modest reduction in the amount of beta, style dispersion, and tracking error in their portfolios.

The data tell us that these asset managers are again likely to underperform their benchmarks since for these managers it is, essentially, business as usual: There’s been little to no change in the way these portfolio managers are constructing their portfolios.

We would have thought that most professional money managers who underperformed in 2012—and 53 % of active asset managers actually did fail to achieve benchmark performance last year—would be doing things differently this year. After all, if a particular approach to managing a portfolio of stocks isn’t working, the logical thing to do would be to change course. Among the possibilities: run a much more concentrated portfolio, i.e., own materially fewer stocks; increase beta, i.e., take more individual-stock risk; generate more tracking error, i.e., hug one’s benchmark less; or run with more style dispersion, i.e., assemble a basket of stocks with a greater mix between small cap and large cap and between value and growth.

We also would have thought that professional asset managers who underperformed in 2012 would be doing things differently this year given the incursion that continues to be made into the business of active managers in general by passive strategies, i.e., index funds and exchange-traded funds.

But it isn’t happening.

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Working with the Morningstar database, RBC looked, for the five months ended May 31, at last year’s underperformers, who have already reported from four different perspectives: 1) the average number of stocks in their portfolios; 2) style dispersion, or the degree to which a manager is assembling a collection of stocks similar in market cap and investment style; 3) tracking error, or the degree to which a portfolio manager’s returns are different from the returns of a fund’s benchmark in a stable manner or unstable manner; and 4) beta, or the volatility of that fund relative to the volatility of the stock market in general.

Our somewhat disheartening conclusion: Very little change is being implemented. In fact, if anything, the change that has taken place so far this year in underperformers’ portfolios seems to be in the direction opposite to what we would have expected and hoped.

Specifically, our study found a modest increase in the average number of stocks in the portfolios in two of the three groups of portfolio managers we looked at, meaning that many of the managers we studied were diversifying more, not less, than they did last year.

Our study found no meaningful change in the underperformers’ style dispersion, meaning the mix of stocks that 2012’s underperformers had in their portfolios was essentially unchanged at mid-year 2013 from what that mix was at year-end 2012.

Meanwhile, tracking error and fund beta seemed to be decreasing for the managers in our study, suggesting that for this cohort of managers, the underperformance in 2012 was being met by taking fewer bets and taking less individual-stock risk in the first five months of 2013 than they did in 2012.

All of this suggests to us that asset managers who failed to beat their benchmarks last year may well face the same outcome in 2013. To be sure, we have only looked at data through May of this year, and some asset managers who haven’t shown an inclination to change their approach through May 2013 may take a different tack as the remainder of the year 2013 unfolds.

Moreover, even though our sample size was quite large—we studied the results of 465, or 22 percent, of the 2,150 U.S. equity funds in the Morningstar Direct database and we believe, therefore, that our results are statistically very credible—we’re doubtful that we’d reach a different conclusion even if we had data on all of the managers. After all, zebras don’t change their stripes, and if a portfolio manager who badly underperformed last year hasn’t decided to change his behavior by this point, we have little reason to think that PM is suddenly going to go in a whole new direction. Some may but most won’t, we believe. So in our estimation, another year of below-benchmark performance is in the cards for the majority of the money-management industry.

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Who are the winners among asset managers?

The updated and expanded study bodes well for asset managers  BlackRock, Inc. (NYSE:BLK), Invesco Ltd. (NYSE:IVZ), and Eaton Vance Corp (NYSE:EV). All three of these managers are less focused than they were in the past on selling individual benchmarked products and more focused on providing investment solutions for their clients. We reiterate our Outperform rating on all three of these solutions-oriented managers. We also reiterate our Outperform rating on T. Rowe Price Group, Inc. (NASDAQ:TROW), which should benefit as well from the likely underperformance of many active managers this year given its history as a superior stock picker.