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Larry Swedroe
Index Investor Corner

Swedroe: Taking On The Lies About Active

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I recently read a white paper written by American Century Investments titledSix Reasons to Emphasize Active Investment Management.” It struck me as having the potential for a little entertainment in exposing the lies behind such stories, so this column puts the six reasons under the microscope. We’ll look at each claim and a quote supporting it, and then go about telling the truth.

Markets Look Forward, Indexes Look Back

“Passive managers buy and hold a security, ignoring any information about either company prospects or market conditions. Intuitively, investing based on that information should benefit active managers. On the other hand, passive investment management—sometimes called index investing—makes no attempt to identify mispriced assets or distinguish between attractive and unattractive opportunities for investors.” Also: “While passive/index investing tracks yesterday’s world, it is active investing that tends to be more forward looking.”

Exposing the Lie

Passive investors do accept that the market price is the best estimate of the right price. Who is setting market prices? They’re set by active investors who are looking forward, paying attention to company prospects and market conditions. And for every active manager that beats the market, there must be another that underperforms. Collectively, active managers must always underperform passive investors in all asset classes and in bull or bear markets because of expenses. It’s just simple math. As Nobel Prize winner William Sharpe points out in “The Arithmetic of Active Management,” “Properly measured, the average actively managed dollar must underperform the average passively managed dollar, net of costs. Empirical analyses that appear to refute this principle are guilty of improper measurement.”

What’s amusing is that the live data on American Century’s own funds provides evidence against its theory. Its website states: “At American Century Investments, our commitment is rooted in focusing on delivering superior investment performance … Our track record of performance … [set] us apart in the industry.” Lots of investors must believe that story, as Morningstar reports that American Century manages more than $100 billion in assets.

We’ll see if their claim holds up to scrutiny, and if the confidence of investors is justified, by comparing the returns of their funds with those of Vanguard’s index funds and Dimensional Fund Advisors’ passively managed funds. The data cover the 10-year period ending May 2013. For each asset class, we used all funds fitting a particular category and chose the lowest-cost version of each fund, as long as it had a record of 10 years or more.

US Large

 

 

American Century All Cap Growth

TWGTX

10.8

American Century Equity Growth

AMEIX

8.1

American Century Growth

TWGIX

7.9

American Century Select

TWSIX

6.0

American Century Ultra

TWUIX

6.3

Average

 

7.8

DFA US Large Company

DFUSX

7.6

Vanguard 500 Index

VFISX

7.5

 

 

 

US Large Value

 

 

American Century Capital Value

ACPIX

6.7

American Century Equity Income

ACIIX

7.9

American Century Income & Growth

AMGIX

7.3

American Century Large Co Value

ALVSX

7.0

American Century Value

AVLIX

8.0

Average

 

7.4

DFA US Large Cap Value III

DFUVX

9.5

Vanguard Value Index

VVIAX

7.9

 

 

 

US Small

 

 

American Century New Opps

TWNOX

8.7

American Century Small Cap Growth

ANOIX

10.8

American Century Small Company

ASCQX

9.2

Average

 

9.6

DFA US Small Cap I

DFSTX

10.9

Vanguard Small Cap Index

VSCIX

11.3

 

 

 

US Small Value

 

 

American Century Small Cap Value

ACVIX

11.1

DFA US Small Cap Value I

DFSVX

11.7

Vanguard Small Cap Value Index

VISVX

10.5

 

 

 

Real Estate

 

 

American Century Real Estate

REAIX

10.8

DFA Real Estate Securities I

DFREX

11.1

Vanguard REIT Index

VGSLX

11.4

 

 

 

International Large

 

 

American Century Intl Growth

TGRIX

8.5

DFA Large Cap International I

DFALX

8.3

Vanguard Developed Markets Index

VDMIX

8.3

 

 

 

International Large Value

 

 

American Century Intl Value

MEQAX

8.1

DFA Intl Value III

DFVIX

9.9

 

 

 

International Small

 

 

American Century Intl Discovery

TIDIX

10.9

American Century Intl Opps

ACIOX

15.2

Average

 

13.1

DFA Intl Small Company

DFISX

11.6

 

 

 

Emerging Markets

 

 

American Century Emerging Markets

AMKIX

14.2

DFA Emerging Markets

DFEMX

15.0

Vanguard Emerging Markets

VEMAX

14.7

 

 

 

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