The less you pay the more you end up with
Posted by Robin Powell on April 21, 2016
Another major study has been released, comparing the performance of active funds with passive, and you’ll never guess the result!
Only joking. Passive smashed active yet again. The latest data comes from Morningstar’s Active/ Passive Barometer, which measures the performance of US-domiciled funds over one, three, five and ten years.
In common with similar scorecards, the best known of which is SPIVA, produced by S&P Dow Jones Indices, the Morningstar data shows the longer the time period, the worse the performance for active funds. Just 27.7% of large-cap blend funds beat their passively managed counterparts in the calendar year 2015; that percentage fell to 16.6% over ten years.
Active managers performed less badly in some sectors than others — they’ve fared reasonably well in Japan, for example — but overall the picture is a very gloomy one for active management.
Yet again, I find myself struggling for something to say about studies that produce more or less the same findings time after time. I would though like to pick out one key takeaway from this particular report.
Although actively managed funds have performed poorly over the last ten years as a group, the worst performers of all have been active funds with the highest fees. Active funds with the lowest fees performed have performed the least badly.
For example, the lowest-cost funds in the diversified emerging-markets category had a success rate that was 18.8% higher than that for the category as a whole over ten years. Meanwhile, the highest-cost mid-value funds had a success rate of just 23.5% during the same period, which is less than half that of the lowest-cost funds and about half that of the category as a whole. Morningstar also found that low-cost funds had a significantly higher survival rate than high-cost funds.
We can make too big an issue of active versus passive. I’ll admit it, I sometimes do myself. The most important issue, ultimately, is cost. There is nothing wrong per se with active fund management; it’s just that the cost of using the vast majority of active funds far outweighs the slim chance that the fund you happen to choose will be one of the long-term winners.
If you focus on just one thing when choosing which funds to invest in, focus on cost. The less you pay the more you end up with. It really is that simple.