Humanity is finally beating the market clones.
During the first four months of the year, active U.S. stock managers have outperformed index funds, the so-called passive strategy funds that seek to mirror the performance of the market.
Through the end of April, actively managed stock mutual funds rose 2.25 percent, including dividends and expenses, slightly ahead of the 2.2 percent rise for stock index funds during the same period, according to The Wall Street Journal, which cited data from Morningstar.
While it's only a slight advantage, it's nonetheless significant given the poor track record of active managers during the past several years. About 86 percent of all U.S. large-cap funds failed to match the S&P 500 last year, according to a study published earlier this year by S&P Dow Jones Indices' SPIVA U.S. Scorecard. The 10-year returns for U.S. active managers were almost as dismal, with 82 percent failing to match the index.
With active managers providing lagging returns in recent years, more investors have become interested in passive investing styles, which generally cost less than active funds and have turned in better results. Supporters of index funds, such as fund giant Vanguard, note that passive exchange-traded funds (ETFs) charge about 43 basis points, compared with 74 basis points for active funds.
No wonder assets in ETFs, which by and large rely on passive strategies that mirror specific market indexes, reached a new record high of $2.09 trillion in February, according to research firm ETFGI.
The debate over whether passive strategies or active managers create stronger performance may never end, but the money flow is pointing to the increasing popularity of passive strategies among average investors, many of whom are fed up with subpar performance and high fees at actively managed funds. Investors have pulled more than $700 billion from active stock funds since 2006, according to The Journal, which noted that index funds and ETFs saw an influx of new investors at the same time.
Still, companies such as Fidelity that rely on selling actively managed funds have a message to investors: Passive isn't always better.
Fidelity, for one, is seeking to "educate our customer base that there are cycles of active versus passive," the company's Chief Investment Officer Tim Cohen told The Journal.
A report from Wintergreen Advisors recently called investors' new love affair with index funds "a market mania," which has committed Americans' savings into "a mechanistic strategy that day in and day out simply buys stocks without a thought for their actual underlying value." Wintergreen, which manages $1.5 billion, added that index funds create "an illusion of safety and diversification," but end up concentrating investments in a "narrow group of mega-cap stocks," which can pose risks of big losses.
Nevertheless, active managers have so far achieved only a small slice of outperformance during a very short time period. Whether they can keep their edge over passive funds may prove the harder test.