Actively managed fund complexes are sparing no effort to remind investors and financial advisers that, despite the headlines, all actively managed mutual funds are not being crushed by indexed strategies.
Fidelity Investments this week updated its ongoing research that shows low fees combined with the resources of large, established investment management companies will give active funds a boost.
Looking at large-cap equity funds, for example, Fidelity found that funds in the
lowest quartile in terms of expense ratios that are offered by the five largest fund complexes beat their respective indexes by about 18 basis points annually.
When the cost of indexed investing is factored in, the screened universe of active funds had about a
22-basis-point edge over index funds.
“The story has grown louder and louder about passive funds outperforming and active funds lagging, and we needed to understand the numbers, because they didn't look like our numbers,” said Timothy Cohen, Fidelity's chief investment officer.
While an 18-basis-point edge over an index might sound like a rounding error to some, Mr. Cohen points out that over time 18 basis points, coupled with the 4-basis-point fee drag from an
index fund, can add up.
Over a hypothetical 40-year retirement-saving period, in which an individual invests $5,000 annually, and assuming an annual return of 7%, the basis-point difference favors the active funds by more than $64,000.
The Fidelity screens narrowed the universe of 800 large-cap equity funds down 220 that had expense ratios below 80 basis points.
There were 79 large-cap equity funds that met the screen of being offered by one of the five largest fund complexes, including American Funds, Fidelity,
T. Rowe Price,
JP Morgan and
The Vanguard Group.
A total of 46 active funds passed both filters.
The Fidelity research follows a
report last week by American Funds that showed how screening for low fees and high portfolio manager ownership of the funds they manage can identify out-performing active funds.
“It's incredibly intuitive, but it makes a difference when a portfolio manager has some skin in the game,” said Steve Deschenes, senior vice president in client analytics and research at American Funds.
“Portfolio manager ownership goes to stewardship and having interests aligned with investors,” he said.
Portfolio managers have been reporting their ownership in funds they manage since 2004.
According to Morningstar Inc., about half of all open-end mutual funds have at least one portfolio manager invested in the fund. And about 41% of all portfolio managers have ownership in at least one fund they manage.
On the factor related to the size of the overall fund complex, Mr. Deschenes concurred that, even though low fees have become the common denominator, there is value in having the resources to support
portfolio management and the assets to create economies of scale that often lead to lower fees.
“As we identified in our research, low fees are a critical element of investor success,” he said. “An important benefit of size and scale is you can keep fees low.”
The effort by active-management fund shops to highlight ways to navigate the universe of actively managed funds is to be expected, according to Todd Rosenbluth, director of mutual fund and ETF research at S&P Capital IQ.
Not only have investors been moving out of active funds and into indexed strategies for the past decade, but the story of how
index funds are outperforming most actively managed funds is turning into a steady drumbeat.
“The cheaper the fund, the greater the chance of keeping up with an index with no cost, or an index fund with minimal costs,” Mr. Rosenbluth said.
“The active fund companies are offering, with obvious subjectivity, that you can do these screens yourself to rebut the reality that the average active fund will underperform its index,” he said. “They're trying to guide investors through the universe by saying, 'Don't pick the average fund.'”
