We have completed the sixth iteration of our research study titled “The Next Chapter in the Active versus Passive Management Debate” where we evaluate the persistency of top quartile mutual funds in 17 different categories during the ten-year period ended December 2020. Despite the different market environments captured in each of the time periods since the first edition of the paper in 2007, our primary observations have remained consistent over time.
As a reminder from our last edition, this analysis is for all actively-managed strategies as defined by Morningstar. All passively-managed funds that have achieved ten-year track records are independently analyzed at the end of the paper.
• 85 percent of ten-year top quartile mutual funds were unable to avoid at least one three-year stretch in the bottom half of their peer groups. This result is modestly lower than the median of the historical range of 83 to 92 in our past five editions, but up modestly from the 83 percent we observed in our last edition. As in the previous edition, we continue to attribute the lower percentage compared to the historical range to be a function of more consistent results in Intermediate Bonds and Large Cap Core equities, which represent a high percentage of the funds analyzed.
• 57 percent of ten-year top quartile mutual funds were unable to avoid the bottom half during a five-year period. This result is modestly lower than the median of the historical range of 54 to 63 in our past five editions, but up modestly from the 54 percent we observed in our last edition.
• Top quartile mutual funds with three-year stretches in the bottom half of their peer group spent, on average, five to six consecutive quarters below the median. Top quartile funds spent an average of 21 percent of rolling three-year periods in the bottom half of their peer groups.
• Owning the 39th percentile mutual fund in all 17 categories would have matched the weighted index return for a 70 percent equity and 30 percent fixed income portfolio during the ten-year period. This result is modestly lower than the median of the historical range of 36 to 52 in our past five editions, and up modestly from the 37 percent we observed in our last edition. The trend that more effective manager selection is required to match the weighted index return continues to be persist in general, including in the recent ten-year period.
• Recent data suggests that actively-managed strategies tend to struggle in strong up markets compared to passive strategies, especially in domestic equity asset classes. Many asset classes generate outperformance in the top quartile of their peer group and to a lesser extent the median manager more often in down markets.
• Investing passively does not completely insulate investors from volatility in relative performance compared to active peers and in some asset classes has guaranteed sub-par results over the most recent ten-year period.
• Falling prey to natural human behavioral tendencies during the manager selection and termination process generally leads to failure. Investors need to make a concerted effort to understand a manager’s investment process, sub-style and investment philosophy before investing to develop the confidence and patience required for long-term success.
The information contained herein is confidential and the dissemination or distribution to any other person without the prior approval of Fiducient Advisors is strictly prohibited. Information has been obtained from sources believed to be reliable, though not independently verified. Any forecasts are hypothetical and represent future expectations and not actual return volatilities and correlations will differ from forecasts. This report does not represent a specific investment recommendation. The opinions and analysis expressed herein are based on Fiducient Advisor research and professional experience and are expressed as of the date of this report. Please consult with your advisor, attorney and accountant, as appropriate, regarding specific advice. Past performance does not indicate future performance and there is risk of loss.