Swedroe: Top Firms Fail To Beat Passive

April 21, 2017

In the quest for money managers that can outperform appropriate benchmarks, one of the theoretical advantages that large pension plans have over individual investors is that they often hire professional consultants to help them perform due diligence in interviewing, screening and ultimately selecting the very best of the best.

You can be sure that these consultants have thought of every conceivable screen to identify the best fund managers. Surely, they have considered not only managers’ performance records, but also factors such as their management tenure, depth of staff, performance consistency (to make sure that a long-term record is not the result of one or two lucky years), performance in bear markets, consistency of strategy implementation, costs, turnover, and so on. It’s unlikely there is something that you or your financial advisor would think of that they hadn’t already considered.


Two Top Firms Vs. Passive Management

Two of the leading firms in this space are SEI and Russell. In addition to providing investment consulting to pension plans and other institutional investors, both firms also offer advice to investment advisors on selecting the best active managers. Moreover, they have their own family of actively managed mutual funds. Many financial advisors use these funds. In fact, Morningstar shows that SEI’s mutual funds have about $94 billion in assets under management and Russell’s funds have roughly $40 billion. Obviously, people believe that Russell and SEI must be able to identify future alpha generators. The question is: Is that belief justified?

I have been reporting on the results of their efforts for some time now, tracking the performance of SEI and Russell funds and comparing them to the passively managed funds of Dimensional Fund Advisors (DFA). (Full disclosure: My firm, Buckingham Strategic Wealth, recommends DFA funds in the construction of client portfolios.) Every time I perform this analysis, I update fund performance figures. I started tracking their performance in 2000, so we now have 17 years of data. That’s certainly sufficient time to differentiate skill from luck.

The results continue to be both amazing and consistent. Each time I’ve run the data, both Russell and SEI not only fail to outperform, but fail to outperform in a single asset class (though this time around Russell managed to tie DFA in one asset class). Now, that’s awfully hard to do, even if you were to set out to do it (unless, of course, you simply churn accounts). Yet, both SEI and Russell have managed this feat.

The following table presents the results over the period for which we have data for all of the funds, the last 17 years (2000-2016). Where more than one version of a fund is available, the lowest-cost version is used. As you can see, actively managed equity funds from SEI and Russell underperformed DFA’s passively managed funds in every single case. It didn’t matter whether the asset class was large caps or the supposedly inefficient classes of small caps and emerging markets.

Fund Annualized Return 2000-2016 (%)
U.S. Large  
SEI Institutional Managed Large Cap Growth A  1.1
Russell US Core Equity I  3.8
DFA US Large Company Portfolio  4.5
U.S. Small   
SEI Institutional Managed Small Cap Growth A  2.9
Russell US Small Cap Equity I  7.3
DFA US Micro Cap Portfolio Class  9.9
U.S. Large Value   
SEI Institutional Managed Large Cap Value A  5.7
DFA US Large Cap Value Portfolio III  8.4
U.S. Small Value   
SEI Institutional Managed Small Cap Value A  9.7
DFA US Small Cap Value Portfolio Class I  11.3
Emerging Markets   
SEI Institutional International Trust Emerging Markets Equity A 3.8
Russell Emerging Markets S  5.9
DFA Emerging Markets Portfolio Class I 5.9
SEI Institutional International Trust International Equity I  0
Russell International Developed Markets I  2.2
DFA Large Cap International Portfolio Class I  2.4
DFA International Value Portfolio III  5.4
DFA International Small Company Portfolio Class I  8.2
DFA International Small Cap Value Portfolio Class I 9.8

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