This year, investors have continued to flock away from active investments towards low-cost passive funds as they seek to replicate the market’s performance at the lowest possible cost. Indeed, flows from active to passive funds increased to nearly $500 billion in the first half of 2017. However, according to the latest Natixis US Trends Report during the first half of 2017, portfolios that had active managers outperformed completely passive counterparts.
Active managers outperformed according to H1 data
The Natixis US Trends Report compares performance and asset allocations of 345 portfolios, submitted by financial advisors from 1/1/17 to 6/30/17, and Moderate Model Portfolios with each other and selected benchmarks. Data from 2,812 portfolios submitted from 1/1/13 to 6/30/17 is also used to provide a complete picture.
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Natixis' data shows that the average moderate-risk model portfolio returned 6.8% for the first half of the year, outpacing the 60/40 portfolio represented by the S&P 500 and the Bloomberg Barclays US Aggregate Bond Index by 0.30%. Portfolios with a larger active exposure performed significantly better than 100% passive counterparts with the top quartile of portfolios, which had lower exposure to passive investments, outperforming the bottom quartile by more than 300 basis points.
It seems active managers are making a come back after two years of poor performance. In the first half of 2015 and 2016, portfolios favoring passive managers had a slight performance edge on average, 0.07% and 0.26% respectively. But this trend has reversed in the first half of 2017, as active managers outperformed by 0.26%.
One of the more interesting takeaways from the report is how passive allocations within the portfolios surveyed have grown since 2013. For example, the 2013 surveys showed an average passive allocation of 12.2%, rising to 14.4% in 2014, 18.4% in 2015, 19.4% in 2016 and finally 22.8% for the first half of 2017.
The impact this trend has had on fees is clear. As passive allocations have grown, and as active managers have cut fees to better compete with the competition. The average portfolio fee fell from 84 basis points (or 0.84%) three years ago to 65 basis points (0.65%) for the first half of 2017. Almost all of the decline in fees has occurred during the past two-and-a-half years.
Another interesting takeaway from the data is that fixed income allocations hit a three-year high in the second quarter of 32.1%. The average equity allocation has remained stable at around 52.3% for the past three years.