COTW: Convergence of Active & Passive U.S. Equity Funds

COTW: Convergence of Active & Passive U.S. Equity Funds

Morningstar recently published their April Fund Flows report. Per the report: “at the end of April passive U.S. equity fund assets essentially reached parity with active U.S. equity funds at $4.3 trillion each”. Contrast that with the balance back in 1998 when there were 6.5 times as many assets in actively managed U.S. stock funds as in index funds. The primary reason for the shift in investor preference has been the inability of most higher-priced active managers to beat their passive peers (or self-assigned benchmarks). These struggles were punctuated during the Financial Crisis in 2008 when most active managers failed to protect investors from severe losses, at a time when investors needed that protection most. In contrast to the growth in market share of index funds in U.S. stocks, many other asset classes with less trading volumes and liquidity, lower analyst coverage and access to information continue to be dominated by active managers. We view low-cost, tax-efficient index-funds as an effective tool for the core of most client portfolios, but still believe investors should still consider niche active managers in a host of asset classes for both return enhancement and risk management. In fact, the abnormally high returns of passively-managed funds in core stock and bond markets, is leading us to marginally increase exposure to many of these alternative assets.

 

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