At the end of October, Jack Bogle, founder of Vanguard and pioneer of the index-based investing declared that passive investing could eventually account for 90% of the global equity market as investors shun active managers completely. This target is not entirely unreasonable. As the flow of assets towards passive funds has accelerated during the past few years, passive funds have risen to 47% of the assets managed by the US fund industry with active mutual funds in particular getting hit by low cost index funds and ETFs..
According to analysis from Berstein published earlier this year, passive equity management is expected to overtake funds managed by active advisers by January 2018.
Active Mutual Funds Finally Deliver
However, passive is now starting to look less attractive as it once was because active equity managers are starting to outperform again. Nearly 57%of large-cap US equity fund managers beat the S&P 500 over the past year, according to S&P Dow Jones Indices. According to similar research from Bank of America, in October 48% of managers outperformed, following hit rates of 47% in September and 45% in August. BoA estimates that year-to-date, 55% of managers have beaten their benchmarks, which means 2017 is on track to be the first year since 2007 in which the majority of active funds outperformed.
The data from BoA shows value oriented active mutual funds have achieved the best record of outperformance so far this year:
"Value managers posted the highest hit rate (76%) in two and a half years, the biggest average outperformance (+45bp) in 12 months, and the longest streak (eight consecutive months) of above-50% hit rates since 2008. And year-to-date, 76% of Value managers have outperformed the Russell 1000 Value benchmark – the highest hit rate at this time of the year since 2008."
Meanwhile, growth managers have failed to keep up:
"Growth funds continued to lag, with just 33% of managers beating their benchmark fort he month, although 58% of Growth managers are still ahead year-to-date."
Active managers have received a considerable boost from falling stock correlations and rising dispersion. BoA's analysts note that average pair-wise correlations of both S&P 500 and Russell 2000 have again fallen sharply in October and the correlation of stocks in the S&P 500 is currently at the lowest level since the tech bubble while correlation is at its lowest level since 2003 for the Russell 2000.