I saw this Barron’s article (pay-walled) and decided to see what all the fuss is about in the active manager comeback story. It seems every few months there are press articles or analyst research pieces that proclaim the beginning of “the stock picker’s market”. There was one in Financial Times in January 2014 or one here in August 2013. In the blogosphere, Josh Brown and Ben Carlson have chronicled this game nicely here, here, here and here.
Clearly this “correlation breakdown” story didn’t work out so well the last few times. Is this time different? I have no idea, we’ll have to wait and see. To track such things, there is widely-followed SPIVA scorecard (discussed here), but it only comes out twice a year. However, I can give you an easy way to keep score at home.
All you need is access to free Morningstar page and a ticker symbol for an index fund that belongs in a category you are interested in. I’m going to use the following Vanguard index funds in my analysis (Exhibit 1). Click on Morningstar performance page for any fund, scroll down to “Trailing Total Returns” table and then look at the “Rank in Category” line. For example, Vanguard Large Cap Index Inv (VLACX) ranks at 33% YTD. This means that 33% of other funds in Large Blend category have done better than it, while the remaining 67% have done worse. Since vast majority of the other funds in this category are actively managed, it’s a great proxy for their relative performance. (Note that this only works for index mutual funds and not ETFs which have their own rankings – more on this later).
Exhibit 1 – Vanguard Index Funds in Major Categories
Now, let’s arrange these index funds in the Morningstar Stylebox to see how they stack up versus active counterparts. The results for the past few years are shown in Exhibit 2. The numbers below 50% are highlighted in orange and indicate that average active fund has done better than the index. Apparently active funds didn’t get the memo about 2015 ostensibly being “the year of a stock picker” (again!). If the best you can do is 58% of funds beating index in a small growth space… Across all categories, the average “beat rate” is only 38%. Moreover, I would argue that the middle column (blend funds) are by far the more important one (more on that in the next post) and it’s not looking so good for our fund manager friends. Looking back at the past few years, the numbers are similarly mediocre with 2014 being particularly horrid for the active funds.
Exhibit 2 – Vanguard Index Funds Rank in Category by Morningstar Stylebox
If we zoom out from single years, longer-term results look even worse for the managers (Exhibit 3). But we already now that from SPIVA publications. And just in case you were wondering if the turnaround JUST STARTED – it didn’t – 1 day, 1 week, 1 month & 3 month results are equally bleak!
Exhibit 3 – Longer-term Vanguard Index Funds Rankings
So there you have it – no turnaround yet, but go ahead and keep score if you wish.
Category performance ranking by MS is quite convoluted, or as The Dude would say “This is a very complicated case, Maude. You know, a lotta ins, a lotta outs, a lotta what-have-yous. And, uh, a lotta strands to keep in my head, man. “
I plan on doing a deeper dive to see how it’s all calculated in the next post.