In a year when some stocks did a lot better than others, active managers underperformed.
Last year certainly provided active managers with plenty of opportunities to outperform, and it’s worth examining if they really did.
For example, while the S&P 500 Index returned 32.4 percent, Netflix (NLFX), the top performer in the index, returned 297 percent. Two other stocks, Micron Technology (MU) and Best Buy Co. (BBY) returned more than 200 percent.
Another nine stocks returned more than 100 percent. And 10 others returned more than 90 percent. The average return of the top-25-performing stocks of the S&P 500 was about 120 percent, or about 88 percentage points above the return of the index.
On the flip side, the worst performer, Newmont Mining (NEM), lost about 50 percent. The next two biggest losers lost 41 percent and 32 percent, respectively. Another six stocks lost at least 20 percent. Nine others lost at least 10 percent. And the average loss of the worst 25 performers was about 28 percent.
The gap between the average return on the top 25 performers and the bottom 25 performers was 116 percentage points. That presented a huge opportunity for active managers to add value—just load up on the top 25 and avoid the bottom 25. Simple, right?
It turns out it was not so simple. Morningstar reports that the Vanguard 500 Index Fund (VFINX) outperformed 55 percent of active managers in its category (large blend), and the Vanguard Value Index Fund (VIVAX) outperformed 65 percent of active managers in its category (large value).
Dimensional Fund Advisors, the leading provider of passively managed asset class funds, also runs a large blend and a large value fund. (Full disclosure: My firm Buckingham recommends Dimensional funds in constructing client portfolios.) DFA’s large-blend fund (DFUSX) outperformed 58 percent of the active fund managers in its category, and DFA’s large-value fund (DFLVX) outperformed 97 percent of active managers in its category.
The conclusion we can draw is that while such wide dispersions in returns provide the opportunity for active managers to outperform, there’s just no evidence that they’re able to persistently exploit those opportunities.
The other conclusion we can draw is that there really is no such thing as a stock picker’s market. Keep that in mind that next time you hear some “talking head” make that claim. Next time, we’ll explore how 2013 fared for small-cap stock pickers.
Larry Swedroe is director of Research for the BAM Alliance, which is part of St. Louis-based Buckingham Asset Management.