Armed with 15 years of data and various market cycles, S&P analysis shows that most mutual funds have trouble beating their respective indices with just one of 175 growth funds performing better over that period – just 8% of US stock funds in 401k plans outperformed. No wonder more DC plans and money managers are going passive.
Twice a year, S&P checks how mutual funds perform against their indices – analysis over 15 years which includes two rallies and one massive downturns shows that a majority did not beat their indices especially equity funds. With a strong 6.7% annualized return over 15 years, it’s no wonder.
But some bond funds performed well last year with 80% of intermediate term high quality bond funds beating their index. Some predict these kinds of results to continue with raising interest rates. Other active managers believe that the next market downturn will benefit them.
Regardless, there’s a thundering herd moving out of active to passive funds with $638 billion moving into index funds over the past 12 months at the expense of active funds which lost $310 billion. According to P&I, a majority of assets in the top 100 DC plans were passive in 2015. Recently, BlackRock announced that it was going passive for dozens of active funds, mostly US equities, affecting $30 billion in assets.
Results by Vanguard are stunning gathering 8.5 times more assets than all active money managers combined over the last three years.
To make a point that large pension funds may be wasting their money chasing returns using hedge funds, Warren Buffet bet that the Vanguard S&P 500 could beat a basket of funds chosen by a prominent hedge fund manager. The results after nine years are 7.1% for the S&P v. 2.25% for hedge funds.
With more money moving into target date funds, it might be tempting for plan sponsors to use index strategies with Vanguard overtaking Fidelity as the largest TDF manager. Except that there is no such thing as a passive TDF with the glide path, perhaps the most important part of a TDF, always active.
