Swedroe: Don’t Believe The Active Hype
The oldest mutual fund provider stands firmly behind its active management. It really shouldn’t.
I was struck recently by a commercial for the MFS family of mutual funds. In its advertisement, MFS stated: "We believe in the power of active management." They then went on to boast about the power of their global network, saying: "There's no expertise without collaboration."
To determine if there is any evidence to back up its claims, we'll go back to my trusty videotape. But before checking the historical record, it's worth noting that the first U.S. mutual fund was created by MFS Investment Management (formerly Massachusetts Financial Services) in 1924. The fund went public in 1928, allowing investors to pool their money together for the first time.
Analyzing The Performance
MFS is a highly successful firm, managing more than 80 funds with almost $200 billion in assets under management. Let's take a closer look to see if the performance of these funds supports the firm's assertions. To bring the number of funds we'll analyze to a manageable level, and so we can compare the performance of these funds to a passively managed benchmark in a simple manner, an MFS fund will have to meet the following criteria:
- At least a 15-year track record
- Assets under management must be at least $750 million
- Be an equity fund (no bond funds or balanced funds)
- Be either domestic or international (no global funds)
- Be either large or small (no midcap funds)
Introducing these criteria brings the list of MFS funds eligible, for comparison purposes, down to 11. These 11 funds have approximately $106 billion in assets under management, or about 55 percent of the firm's current total.
We'll compare the performance of these 11 actively managed funds with funds in the same asset class that are managed by Dimensional Fund Advisors (DFA), which provides passively managed asset class funds that aren't also index funds.
In the interest of full disclosure, my firm, Buckingham, has been using DFA funds to construct client portfolios for about 20 years now. Thus, there is no hindsight bias at work here. The table below uses data from Morningstar and covers the 15-year period ending March 13, 2015.
Performance Of MFS Funds Vs. DFA Funds
| Fund | Symbol | Annualized Return (%) | MFS Return Minus DFA Return (%) |
| MFS Core Equity A | MRGAX | 5.8 | 1.5 |
| DFA U.S. Large Company | DFUSX | 4.3 | |
| MFS Emerging Markets Equity A | MEMAX | 5.9 | -1.4 |
| DFA Emerging Markets | DFEMX | 7.3 | |
| MFS Growth B MEGBX | MEGBX | 0.6 | -3.7 |
| DFA U.S. Large Company | DFUSX | 4.3 | |
| MFS International Growth A | MGRAX | 4.4 | 1.2 |
| DFA Large Cap International | DFALX | 3.2 | |
| MFS International Value A | MGIAX | 7.3 | 0.7 |
| DFA International Value | DFIVX | 6.6 | |
| MFS Institutional International Equity | MIEIX | 5.7 | 2.5 |
| DFA Large Cap International | DFALX | 3.2 | |
| MFS Massachusetts Investors Growth | MIGFX | 2 | -2.3 |
| DFA U.S. Large Company | DFUSX | 4.3 | |
| MFS Massachusetts Investors Trust A | MITTX | 4.8 | 0.5 |
| DFA U.S. Large Company | DFUSX | 4.3 | |
| MFS New Discovery A | MNDAX | 3.5 | -5.1 |
| DFA U.S. Small Cap | DFSTX | 8.6 | |
| MFS Research International A | MRSAX | 3.5 | 0.3 |
| DFA Large Cap International | DFALX | 3.2 | |
| MFS Value A | MEIAX | 8.3 | -0.7 |
| DFA U.S. Large Cap Value | DFLVX | 9 | |
| MFS Average Return | NA | 4.7 | -0.6 |
| DFA Average Return | NA | 5.3 |
Active Managers Have Poor Odds
As you can see, six of the 11 actively managed MFS funds underperformed the comparable passively managed fund from DFA. What's more, the average MFS fund underperformed the average DFA fund by 0.6 percentage points.
While MFS wants you to believe in the power of active management, the evidence from the last 15 years doesn't suggest that you should. Let's address the other statement in the MFS commercial: "There's no expertise without collaboration." Well, there is also no evidence MFS was able to translate collaboration or expertise into an advantage sufficient enough to outperform a passive portfolio in the same asset class.
In 1998, Charles Ellis published his book, "Winning the Loser's Game." In it, he demonstrated that, while it was certainly possible to win the game of active management, the odds of doing so are so low that it wasn't prudent to try. Thus, just like at the roulette wheel and the slot machines in the casinos in Las Vegas, the surest way to win a loser's game is not to play.
In terms of investing, that means abandoning active management and using passively managed funds (such as index funds). In our new book, "The Incredible Shrinking Alpha," my co-author Andrew Berkin and I provide evidence showing that while Ellis was certainly correct to call active management a loser's game 17 years ago, the quest for alpha (outperformance against an appropriate risk-adjusted benchmark) has become even more persistently frustrating since then.
For example, we cite two recent studies that found that, while 20 years ago about 20 percent of active managers were generating statistically significant alpha, the figure is now down to about 2 percent.
I don't know about you, but I don't like to play games where the odds of my winning are so abysmal.
Larry Swedroe is the director of research for the BAM Alliance, a community of more than 150 independent registered investment advisors throughout the country.
