Active managers lost again in 2012

(MoneyWatch) Earlier this year, we saw the results of financial predictions for 2012 and that most didn't come true. However, there was one prediction we weren't able to score: That actively managed mutual funds would beat their benchmarks as a whole. With the release of Standard & Poor's Indices Versus Active scorecard, we now have our answer, and active funds have lost again.

In 2012, 63 percent of large-cap funds, 80 percent of mid-cap funds and 67 percent of small-cap funds underperformed. The only asset class to see the majority of active funds outperform was large-cap growth, with 54 percent beating their benchmarks. The worst performance came in mid-cap growth funds where 87 percent failed to outperform.

As we would expect, the performance tends to worsen when we look at longer periods. This is because the typically higher expense ratios of active funds become a greater burden over time. For the past three-year and five-year periods, 86 percent and 75 percent of large-cap funds underperformed, 80 percent and 90 percent of mid-cap funds underperformed, and 67 percent and 83 percent of small-cap funds underperformed, respectively. And there were no asset classes where a majority of active managers outperformed.

Domestic

Over the one-year, three-year and five-year periods, large-cap funds underperformed their benchmark return 16.0 percent versus 14.7 percent, 10.9 percent versus 9.0 percent, and 1.7 percent versus 0.9 percent, respectively. For mid-cap funds, the figures are 17.9 percent versus 14.5 percent, 13.6 percent versus 10.9 percent, and 5.2 percent versus 2.4 percent, respectively. For small-cap funds, the figures are 16.3 percent versus 14.6 percent, 14.1 percent versus 11.6 percent, and 5.1 percent versus 3.0 percent, respectively.

International

In international markets, the results were more mixed. For global funds, the one-year, three-year, and five-year results show that 64 percent, 66 percent and 62 percent of active funds underperformed, respectively. For international funds, the figures are 44 percent, 56 percent and 74 percent, respectively. For emerging market funds, the figures were 46 percent, 58 percent and 76 percent, respectively. The one outlier was international small cap funds where just 15 percent, 10 percent, and 21 percent of active funds were found to have underperformed. Overall, you'll note that the longer the period, the worse the performance tends to be.

Bonds

With bond funds the results were also more mixed with active funds outperforming in several categories in 2012, though in no categories over a five-year period. For long-term government bond funds the one-year, three-year and five-year results show 69 percent, 98 percent and 94 percent of funds underperforming, respectively. For intermediate-term and short-term government funds, the results were better with 31 percent and 40 percent underperforming in 2012, 58 percent and 48 percent underperforming over the prior three years, and 50 percent and 59 percent underperforming over the prior five years, respectively. Similar results were found in investment grade bond funds.

For high yield active funds, the results were worse. The one-, three- and five-year results show 74 percent, 94 percent, and 95 percent of active funds underperforming, respectively. Active emerging market bond funds did fare somewhat better with 51 percent, 66 percent and 60 percent of the funds underperforming, respectively. Note that the high costs of trading in high-yield bonds and emerging market bonds helps explain the underperformance.

Now that the results are in we can once again declare that the active managers were wrong: It wasn't a stock picker's year.

Image courtesy of Flickr user 401(K) 2013. 

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    Larry Swedroe is director of research for The BAM Alliance. He has authored or co-authored 13 books, including his most recent, Think, Act, and Invest Like Warren Buffett. His opinions and comments expressed on this site are his own and may not accurately reflect those of the firm.

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