Studies have shown that just 24 percent of mutual fund managers that are active have outperformed the market index, which is a shockingly low number to see over the last 10 years. This isn’t the only data that has gone through as surprising over the recent study—let’s look at some of the other numbers that matter most to you.
Active Versus Passive Management
Managers that are currently active are earning 0.12% more in returns before fees compared to index investors. However, these managers have been charging an average of a 1.07% fee, while the index fee has been sitting at 0.15%. This means that active investors are making 0.80% less than index investors. That’s a very large disparity that has raised some eyebrows, and even more questions.
| U.S. Mutual Fund Realized Returns & Risk, 2002-2012 | ||||||
|---|---|---|---|---|---|---|
| Return | Risk | Risk-Adjusted Return | ||||
| Active | Index | Active | Index | Active | Index | |
| U.S. EQUITY: SIZE & STYLE | ||||||
| Large Value | 5.97% | 6.64% | 16.52% | 18.04% | 0.36 | 0.37 |
| Large Blend | 6.89% | 7.16% | 17.28% | 17.22% | 0.40 | 0.42 |
| Large Growth | 7.87% | 7.38% | 17.93% | 16.97% | 0.44 | 0.43 |
| Mid-Cap Value | 8.08% | 7.40% | 19.43% | 20.38% | 0.42 | 0.36 |
| Mid-Cap Blend | 7.64% | 9.89% | 21.93% | 20.52% | 0.35 | 0.48 |
| Mid-Cap Growth | 8.55% | 7.34% | 20.72% | 19.38% | 0.41 | 0.38 |
| Small Value | 7.50% | 9.24% | 21.65% | 21.75% | 0.35 | 0.42 |
| Small Blend | 7.36% | 10.20% | 21.20% | 21.84% | 0.35 | 0.47 |
| Small Growth | 8.19% | 11.10% | 21.67% | 22.36% | 0.38 | 0.50 |
| U.S. EQUITY: RISK-TOLERANCE | ||||||
| Aggressive Allocation | 6.14% | 4.88% | 15.15% | 13.27% | 0.41 | 0.37 |
| Moderate Allocation | 6.26% | 6.56% | 12.23% | 10.34% | 0.51 | 0.63 |
| Conservative Allocation | 5.20% | 4.06% | 11.54% | 7.94% | 0.45 | 0.51 |
| FOREIGN | ||||||
| Foreign Small/Mid Blend | 8.26% | 7.92% | 18.35% | 27.16% | 0.45 | 0.29 |
| Foreign Large Blend | 6.06% | 8.38% | 22.03% | 21.81% | 0.27 | 0.38 |
| Europe Stock | 8.05% | 7.81% | 21.49% | 23.73% | 0.37 | 0.33 |
| Diversified Emerging Mkts | 13.31% | 15.87% | 25.30% | 26.37% | 0.53 | 0.60 |
| Diversified Pacific/Asia | 7.27% | 7.79% | 22.90% | 19.55% | 0.32 | 0.40 |
| GOVERNMENT BOND | ||||||
| Long Government | 4.67% | 5.45% | 12.75% | 24.09% | 0.37 | 0.23 |
| Intermediate Government | 2.80% | 2.83% | 3.12% | 5.24% | 0.90 | 0.54 |
| CORPORATE BOND | ||||||
| Long-Term Bond | 4.65% | 4.80% | 9.36% | 9.70% | 0.50 | 0.49 |
| Intermediate-Term Bond | 3.28% | 3.06% | 4.51% | 3.51% | 0.73 | 0.87 |
| Short-Term Bond | 2.08% | 2.30% | 3.42% | 2.31% | 0.61 | 1.00 |
| OTHER | ||||||
| Real Estate | 7.92% | 9.65% | 26.02% | 26.53% | 0.30 | 0.36 |
| Bear Market | -6.69% | -10.46% | 24.56% | 15.86% | (0.27) | (0.66) |
| Retirement Income | 4.48% | 3.72% | 7.47% | 4.67% | 0.60 | 0.80 |
| *All numbers are asset-weighted | ||||||
Summary Table via NerdWallet
Over the past 10 years, growth stocks performed better over value stocks by a large margin. At 8.42% for small growth stocks, that number is quite significant over the 7.66% for the value stocks. The discrepancy was even higher for large stocks as the large growth stocks performed at 7.85% while value stocks came in with a 5.98% return.
It was also shown that the largest returns and lower risks came from the largest mutual funds available. The returns for mutual funds that were over $10 billion came in with a 6.99% while the risk percentage was just 14.08%. Compare that to mutual funds of under $10 million that showed a return of 3.57% and a risk of over 21% it is clear to see that the larger a mutual fund is, the better it is going to perform. Expenses will of course go down as fund size increases and that means a large portion of that is fixed.
What it means for you
From what we’ve seen here, the more money that you are investing into larger mutual funds and growth stocks, the better you are going to do in the market. Not only have the larger stocks been less risky, but they have also yielded a higher return than their smaller competitors.
The fees of having a professional handle the market have shown over the last decade that it may not be worth using their services. The cost of those fees compared with the return that they have been getting should be enough to want you to do the studying and investing yourself. With an outperformance rate of just 24%, it’s an extreme risk that many won’t be willing to take.
So now that you have seen some of the numbers, make sure to carefully look over all of your options before investing. Large investments into higher mutual funds have appeared to take over as a great way of receiving a large return. Expert advice is not cheap, so remember that when you are considering investing through an active manager as the performance numbers have been lacking. It is your money, after all, so make sure to place your risk in the right places.
Angie Picardo is a writer at Nerdwallet, a personal finance website that offers advice on topics ranging from business news to weighing the benefits of ETFs vs Mutual funds.
