Active Mutual Fund Managers Are Having A Crummy Year (What Else Is New?)

As some of you (hopefully) have realized by now, I’m not a big fan of actively managed equity mutual funds. Particularly the domestic ones. I have my reasons, well, actually like four of them. We’re not going to get into all four in this post though. Only one of them today.

Performance relative to their respective benchmarks.

I was perusing financial media over the weekend, and came across an article about a recent report from a major financial institution detailing the performance of their actively managed mutual funds thus far in 2018.[1]

Obviously, I clicked on it and read it. It’s fun when you read an article that supports your position on something you feel strongly about. Here’s a few notable quotes:

“J.P. Morgan shared the latest performance data with its clients, revealing only 41 percent of active fund managers are beating their benchmark year to date versus 52 percent last year in the same time period.”

“We estimate that Passive is now more than 50% of equity AUM,” the strategist (Dubvraka Lakos-Bujas, U.S. equity strategist) said.

Here’s the funny thing about this article; these aren’t “bad times” for active managers. For all intents and purposes, this is the norm.[2]

In any given year, active domestic equity management experiences a beat rate of what essentially amounts to a coin flip.[3] When I say, “beat rate,” what I mean is the percentage of actively managed domestic stock funds that beat their benchmark in a given time period (YTD, 1-year, 3-year etc). For example, large-cap mutual funds, in many cases, are compared against the S&P500 index (however, SPIVA® uses the S&P1500 composite index in their research) as their benchmark. In 2017 the beat rate for Large-Cap Mutual Funds was 36.92%[4].

Let’s take a quick look at some long-term statistics regarding actively managed domestic equity mutual funds and their beat rates.


Fund Category Comparison Index 1-Year 3-Year 5-Year 10-Year 15-Year
All Domestic Funds S&P Composite 1500 36.57% 16.60% 13.28% 13.35% 16.26%

Source: SPIVA® U.S. Scorecard Year End 2017. Percentages represent active mutual funds that outperformed their respective benchmark. The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendation for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly. The S&P Composite 1500® combines three leading indices: The S&P500®, The S&P Midcap 400®, and the S&P Smallcap 600® to cover approximately 90% of the U.S. market capitalization. It is designed for investors seeking to replicate the performance of the U.S. equity market or benchmark against a representative universe of tradable stocks. No strategy assures success or protects against loss. Investing involves risk, including possible loss of principle. Value will fluctuate with market conditions and may not achieve its investment objective. Returns are annualized. Past performance is no guarantee of future results. Table is provided for illustrative purposes only.

As you may be able to deduce from this table, during any given calendar year, your average active mutual fund has a decent chance of outperforming its respective index. However, the further out in time you look at the research, the worse the beat rate gets.

According to the prior referenced article, JP Morgan told its clients last week that roughly 40% of their active fund managers were beating their benchmarks YTD (Year To Date) in 2018. The headline says that these are “Bad Times For Active Managers Again.”

But I say otherwise.

2018 seems to be a normal year for active management, not a bad one. The fact that a 40% beat rate is customary for active mutual fund managers is as sobering as it is lamentable.

Does active management have a place in a person’s portfolio? Sure, one could make the case. Hell, I would probably agree with some of those arguments. However, the statistics don’t lie. Over the course of 3+ years, the chances of a fund manager beating his or her index is pretty slim. It’s no wonder that passively managed investment are now around 50% of total AUM (assets under management) industry-wide.  This the sort of stuff I want you to know as you make your investment decisions.

Ok, that’s it. I’m done.

[1] Source:

[2] Source: Data as of 12/31/2017 and taken from SPIVA U.S. Year End 2017 Report

[3] Source: Data as of 12/31/2017 and taken from SPIVA U.S. Year End 2017 Repor

[4] Source: Data as of 12/31/2017 and taken from SPIVA U.S. Year End 2017 Report

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