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One Very Big Strike Against Active Management

The lower the expense hurdle, the less high that management must jump

On April 13, The Wall Street Journal reported that “indexes beat stock-pickers even over 15 years.” That is, after paying their expenses, most actively run stock funds posted lower returns from January 2002 through December 2016 than did their no-cost benchmarks. That would be bad enough if the benchmarks were merely theoretical. Unfortunately for actively managed funds, however, index funds have turned stone into flesh, making the competitive threat all too real.

You knew that already. Technically, you did not know that the indexes had triumphed for 15 years, because previous active management versus index comparisons have been conducted over 10-year periods. But you would have strongly suspected such a thing. However, here are three additional items that may surprise you. (If none do, congratulations! Feel free to inform me of your coup. But not my editors, thanks much; they don’t need to learn that I am replaceable.)

The Journal’s reporters, as with most who cover the subject, focused on U.S. equity funds. Those figures were, shall we say, unhappy. That study, “SPIVA U.S. Scorecard” (by S&P Dow Jones Indices), found that more than 90% of actively run U.S. diversified funds trailed their benchmarks for the trailing 15 years.

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About Author

John Rekenthaler, CFA  John Rekenthaler has been researching the fund industry since 1988. He is now a columnist for Morningstar.com and a member of Morningstar's investment research department. John is quick to point out that while Morningstar typically agrees with the views of the Rekenthaler Report, his views are his own.

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