With equity markets experiencing levels of volatility not seen in recent years, 2018 was widely viewed as an opportunity for stock pickers and other active managers to outperform their passively managed and index fund counterparts. The actual result was more of the same mediocre performance and a reinforcing belief that it is difficult to beat the market.
According to The Wall Street Journal, only 38% of actively managed U.S. equity mutual funds outperformed their index benchmark in 2018. In 2017, 46% of actively managed U.S. equity mutual funds were able to outperform their benchmark.
The picture looks bleaker for active managers over the long run. Over the last ten years, only 24% of actively managed U.S. equity mutual funds outperformed their benchmark, casting further doubt on the ability of active managers to beat their benchmark in the short or long run.
There were some bright spots for active managers in some investing asset classes in 2018, but those bright spots were few and far between. Of the twenty asset classes tracked by Morningstar and SIX, only three asset classes saw 50% or more of active managers beat their benchmarks. U.S. mid cap growth led the way with 75.8% of active managers beating their benchmark in 2018, followed closely be global real estate where 72.4% of active managers beat their benchmark. The other asset class was U.S. small cap growth where 52.1% of active managers were able to beat their benchmark.
Despite all of the claims by active managers and their advocates to the contrary, ample evidence exists that confirms what classical finance and Modern Portfolio Theory espouse: markets are very efficient and are difficult to beat, especially over the long term. Investors who wish to achieve long-lasting financial success are much more likely to do so by keeping investment costs low and realizing market returns as opposed to trying to beat markets. Both goals are easily accomplished by investing in low-cost, tax-efficient, and well-diversified investment strategies.
Sources: The Wall Street Journal, Morningstar, SIX