Active managers win the bull market

Growth-oriented stock pickers beat their benchmarks, but how long will it last?

Mar 24, 2014 @ 12:18 pm

By Trevor Hunnicutt

At the end of 2010, the Eventide Gilead Fund was ranked in the 87th percentile in its Morningstar Inc. category — midcap growth — trailing not just its competitors but its benchmark too.

But by the end of last year, the actively managed fund didn't just beat most of its competitors, it also achieved another distinction — beating its benchmark, the S&P MidCap 400, by more than 20 percentage points.

Active managers made hay in last year's bull market, with many who were focused on growth picks beating their benchmarks, according to a new report looking at their performance.

Comparable benchmarks beat active managers only 42.6% of the time in large-cap-growth funds and 36.7% in midcap-growth funds, according to the annual S&P Indices Versus Active Funds U.S. Scorecard, which is produced by a McGraw-Hill unit that licenses services to index fund sponsors.

(Look who's going active.)

Still, advocates of passive fund management said the funds' topsy-turvy performance dispersion could mean that that trend may be as fleeting as your confidence in a March Madness bracket. Over three years, benchmarks beat active managers more than three-quarters of the time, across all equity fund categories, according to S&P Dow Jones Indices.

“That proves the point of how hard it is to find mutual funds that will continue to outperform, because the past is just that,” said Todd Rosenbluth, a research director for S&P Capital IQ, a separate unit of The McGraw-Hill Cos.

That is to say, the past is the past. In 2013, the markets rewarded risk, driving increased outperformance, he said.

“You really have to take on a bit more risk to beat the benchmark in order to outperform,” Mr. Rosenbluth said. “They took on the risk, but they got rewarded for that risk with their outperformance, whereas some funds take on the above-average risk and are not rewarded for it.”

The Eventide fund, which gives weight to companies advancing social goals, loaded up on companies with big potential, such as biotechnology medical researcher Novavax Inc. (NVAX) and semiconductor manufacturer Inphi Corp. (IPHI) last year. The two stocks gained 117% and 57%, respectively, in the one-year period through March 21, according to Morningstar.

"Someone that does the bottom-up research on stocks is going to make better investment decisions and create a smarter portfolio,” said David Barksdale, a managing partner for Eventide Asset Management. “If there isn’t performance dispersion, you’re not doing active management.”

But long term, he said, “if you have skill, you’re going to have more winners than losers.”

Mr. Rosenbluth said that the fund, and several others in its category, have higher standard deviations on their rates of return and higher Sharpe ratios. Those quantitative measurements point to higher volatility and risk-adjusted performance, respectively.

But midcap funds also have a higher cost. Owners of average midcap-growth mutual fund pay a 1.3% expense ratio, according to S&P. That's five times more than the iShares S&P Mid-Cap 400 Growth ETF (IJK), a passively managed fund.

Still, advocates of passive fund management said the funds' topsy-turvy performance dispersion could mean that that trend may be as fleeting as your confidence in a March Madness bracket. Over three years, benchmarks beat active managers more than three-quarters of the time, across all equity fund categories, according to S&P Dow Jones Indices.

“That proves the point of how hard it is to find mutual funds that will continue to outperform, because the past is just that,” said Todd Rosenbluth, a research director for S&P Capital IQ, a separate unit of The McGraw-Hill Cos.

That is to say, the past is the past. In 2013, the markets rewarded risk, driving increased outperformance, he said.

“You really have to take on a bit more risk to beat the benchmark in order to outperform,” Mr. Rosenbluth said. “They took on the risk, but they got rewarded for that risk with their outperformance, whereas some funds take on the above-average risk and are not rewarded for it.”

The Eventide fund, which gives weight to companies advancing social goals, loaded up on companies with big potential, such as biotechnology medical researcher Novavax Inc. (NVAX) and semiconductor manufacturer Inphi Corp. (IPHI) last year. The two stocks gained 117% and 57%, respectively, in the one-year period through March 21, according to Morningstar.

A spokesman for Eventide Asset Management, Jason Myhre, did not respond to a request for comment.

Mr. Rosenbluth said that the fund, and several others in its category, have higher standard deviations on their rates of return and higher Sharpe ratios. Those quantitative measurements point to higher volatility and risk-adjusted performance, respectively.

But midcap funds also have a higher cost. Owners of average midcap-growth mutual fund pay a 1.3% expense ratio, according to S&P. That's five times more than the iShares S&P Mid-Cap 400 Growth ETF (IJK), a passively managed fund.

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