‘Active Management Isn’t Dead, It’s Evolving’

January 23, 2017

The days of big-name active managers such as Peter Lynch may be over, thanks largely to consistent underperformance relative to benchmarks over time. The numbers aren’t flattering for active managers.

But that doesn’t mean active management is dead, according to Tom Rampulla, head of U.S. financial intermediaries at Vanguard. Speaking at Inside ETFs Monday, Rampulla put it simply: Active management isn’t dead; it’s evolving in an effort to survive.

From the mid-1970s when Jack Bogle introduced the first index mutual fund for retail investors through to today, active has been losing ground to passive in a trend that is still gathering steam. Last year alone, active mutual funds and ETFs bled more than $200 billion in net redemptions, while passive strategies gained as much in inflows, according to Vanguard data.

“Somewhere along the line, active lost its sizzle [from the days of Peter Lynch],” Rampulla said, adding that from the early 2000s to today, we’ve seen some $1 trillion in flows go into passive versus active.

Passive Winning For Two Reasons

The first reason is cost. Consider this stat: Investors paid an estimated $437 billion in fees to asset managers in the past decade. During that time, these same investors underperformed the market to the tune of $545 billion versus index returns.

It’s no surprise that investors are increasingly turning to lower-fee products. In the past 15 years, some $611 billion has gone into the lowest-cost funds in the market compared to some $550 billion in outflows from the highest-cost U.S. equity funds, Rampulla says.

“This trend will continue,” he said. “Regulation has been a tail wind for passive investing, and despite the massive growth, passive investing is only one-fifth of all global assets invested. Passive is an effective investment strategy.”

The second reason is poor performance. Active managers haven’t cut it. It’s tough to overcome the high costs, Rampulla says.

For instance, in the U.S. large-cap equity space, only 16% of active managers have outperformed the index in a rolling 12-month average since 1993. In emerging market equities, where there’s a lot of value placed on boots-on-the-ground active research, 32% of active managers have outperformed in the last 20-plus years. Even then, the odds aren’t very good.

 

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