Over one, five and ten year periods over 80% of actively-managed funds under-perform their benchmarks.

Volatile markets are generally viewed as a prime opportunity for active managers to shine and demonstrate their stock-picking and market-timing skills and prowess.  Equity markets don’t get much more volatile than they were in the first quarter of 2016, but the investment results for active managers were disappointing.

How volatile did equity markets get?  Well, consider that the S&P 500 index plunged 10% in the first six weeks of 2016, only to finish with a positive gain of slightly more than 1% for the quarter.  The market turnaround observed in the first quarter of 2016 is the largest such quarterly turnaround since 1933, according to the April 11th  issue of InvestmentNews.  And given the large reversal in fortunes, actively-managed mutual fund managers should have had a golden opportunity to outperform the indices.  But the results tell a much different story.

Recent research released from Bank of America  showed that only 19% of mutual funds beat the S&P 500 index in the first quarter of 2016 .  The 19% number represents the lowest percentage of funds beating the S&P 500 index in any given quarter since 1998.  Unfortunately for active fund managers, the longer term performance trends don’t look much better for their performance track records.

Data obtained from 2015 SPIVA U.S. Scorecard/S&P Dow Jones Indices shows that the trend of active fund managers underperforming the S&P 500 index is pretty consistent over a longer time period.  Large cap fund managers’ performance was compared to the S&P 500 index for the past 10 years in the most recent study.  The data from the study shows that 66% of large cap  fund managers underperformed in the one-year timeframe.  Looking at the five-year numbers, 84% of large cap fund managers underperformed the S&P 500.  And over a ten-year timeframe, 82% of large cap fund managers underperformed the S&P 500.

Since 2004 Bollin Wealth Management has been advising our clients to avoid actively-managed funds and utilize low-cost funds (we recommend Dimensional Fund Advisors funds) to construct investment portfolios because of the propensity of actively-managed funds to underperform their benchmarks.

Over the years we have heard the arguments that there are market conditions and times when active managers can add value and outperform the benchmarks.  But when we examine the recent and historical data we find overwhelming evidence that indicates otherwise.  Some investors and advisors must be getting the same message as money has been moving away from actively-managed fund families, i.e. American Funds, and increasingly flowing towards low-cost, non-actively managed mutual fund options like Dimensional Fund Advisors (DFA) and Vanguard.

Sources:  InvestmentNews, Bank of America Corp, 2015 SPIVA U.S Scorecard/S&P Dow Jones Indices.