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“It’s déjà vu (all over again),” is a quip often attributed to beloved baseball philosopher Yogi Berra. He might as well have been referring to the highly regarded and much awaited 2024 S&P Global Report on the comparative performance of actively managed and passive mutual funds. Its conclusions will come as no surprise to readers of Humble Dollar: Index funds drubbed those run by portfolio managers.
Here’s a quick read. Most actively managed stock funds underperformed their relevant benchmarks. Fully 65% of managed large cap stock funds failed to beat the S&P 500, a worse showing than in 2023 and about average for over two decades. To be fair, differential performance was slightly more favorable to active bond funds and notably more so among small caps.
Consistent with voluminous previous research, the further out the time horizon, the greater the advantage of passive funds. Now get this. Over the 15-year period ending in December, actively managed funds could not outperform their passive counterparts in any category, including small stock funds.
Will these latest data move the needle much? Almost certainly not, given the inability of mountains of prior evidence to do so. The egregious monetary rewards of nonproductive financial advising and asset-based mutual fund management pose formidable hurdles. Commissions are down or nonexistent and expense ratios have contracted, but the era of propaganda and outright skullduggery of financial professionals yet endures.
Here’s a case in point. ETF Trends is a popular haven for advisors and purveyors of ETFs and mutual fund companies promoting active management to their adoring disciples, The title of a recent article goes like this: “2024 SPIVA Report Reveals 2 Areas Active Outperforms.” How’s that for a “balanced” introduction to the report’s results?
I group these advisors pushing actively managed funds in the same category as used car salespersons…steer clear!
Paying an advisor to manage money is a bit like paying me to do your taxes. Either is not all that difficult, yet some people are terrified. For those folks advisors and tax preparers are a necessity. The hard part is finding good ones.
Your response reminds me of the oft-repeated notion that a prospective client ask the advisor auditioning for him about his own personal investment portfolio. I don’t get it. Without knowing the purpose and financial goals of the advisor, of what value is that information?
If the advisor is recommending high-cost active funds and tax-deferred annuities, but personally owns index funds, that would be revealing.
Steve – Another great summary! We’re in the age of information for funds and expenses. When I began investing in my first employer’s 401(k) back in the early 1980’s, the choices were dismal and the cost in terms of expense ratio was unknown (or very difficult to determine). Now it’s very easy to compute your weighted expense ratio – if one chooses to do so.
Hey Jeff,
Yup, and in the heyday of the load fund, pre-retirees often were unaware that the commission was being methodically deducted from each monthly contribution.
Thanks Steve. The report is a good read. I have seen portfolios of friends and family managed by advisers and they all had too many investments including many that I had never heard of. This is standard technique for advisers to present a complex portfolio with the underlying message that it is too complicated for the individual investor to manage. Contrare! A 3 fund/etf portfolio of broad market, low cost index funds will do just fine.
Hi Jerry
You’ve hit on the real problem. All those fancy commercials and leather chairs are designed to intimidate you into feeling that you must rely on one of their “experts.” I worry that if social security is privatized advisors and brokers will be raking it in while the unsuspecting investor gets what’s left over.
I would bet dollars to donuts that the data shown is further skewed negative because it excludes active funds that did not survive the time periods studied. They can only report active funds that survived, so the actual data is even worse for actively managed funds.
Fortunately, I don’t have to answer that question. It’s already been answered!
SPIVA adjusts its results for survivorship bias:
https://www.spglobal.com/spdji/en/education/article/spiva-scorecards-an-overview/
https://www.spglobal.com/spdji/en/documents/spiva/spiva-us-year-end-2024.pdf
Good points—what was eye opening to me is the graph of cumulative returns:showing <10% of active funds beat index benchmarks over long time periods in any of the many investing categories, eg large cap/small cap, growth/value, etc.
What stood out to me is the study found, “Over the 15-year period ending December 2024,
there were no categories in which a majority of active managers outperformed.”
So if you are a long term investor….
Also, in the third quarter 2/3 of large cap stocks outperformed the S and P 500 so there was ample opportunity to pick winners even if they were just throwing darts blindfolded at a list of the 500 companies in the index.
Yeah, the findings are really amazing. The managers aren’t just failing to beat the benchmarks—they can’t even match them.
Which probably is about the odds of picking a great stock, that is why broad based index funds win.
Always a pleasure reading you Steve! That last paragraph is about as classic an example of putting lipstick on a pig that I can think of. Can you imagine what would happen to the poor sop who actually wrote a more fact-based headline–say, something like “Index Funds take Hot Shot Active Fund Managers to the Woodshed…Again!” (lol)
Thanks for crafting (another) great (evidence-based) read.
Thank you. I remember an old song from my youth that went something like, “when will they ever learn?” Industry propaganda has been effective at convincing people already shaky about investing on their own to make that financially destructive call to an advisor/broker “expert.” “But where are the client’s yachts?” is a question as apt now as it was several decades ago.
“When will they ever learn?”
perhaps from “Where Have All the Flowers Gone?”
https://www.youtube.com/watch?v=jb2GiMSXJsg
Good to hear from you Steve. It’s volunteer tax preparation season again and I’ve already seen a number of clients with amazingly complex portfolios, full of funds I’ve never heard of. Based on the yearly dividend, you can get an idea of the portfolio value. When you see a portfolio in the low to mid 6 figures that has several dozen funds, you suspect they are being churned by their “wealth manager”. It’s sad and frustrating.
Hi Rick,
Boy, you are really in the “sweet spot.” I can only imagine what you encounter. Must be hard to know just how helpful investment-wise you can/should be in your role. And you also get to take a peek at the capital gains and losses! My own accountant must have rolled his eyes when he saw my losses in one of those rough market years. BTW, I think it’s great that you’re assisting all those folks with their taxes. So hard to find an accountant who can be gentle or firm as the situation warrants.
There will always be those who are willing to betray the trust of the unsuspecting if the payoff is large enough.
Hi Edmund
That’s precisely the problem—the payoff is very large indeed and the propaganda is effective in convincing tentative investors that they require the expertise of an advisor/broker to succeed in the market. Sad but encouraging that index funds keep taking asset share away from actively managed ones.
Or the more things change the more they stay the same. As I have instructed my daughter, target date funds, increase your percentage deducted from your pay check after each raise. If you were able to meet your financial obligations with your previous salary, you dont need to spend more just because your making more. Lifestyle creep Im sure has ruined many a retirement plan.
Lifestyle creep is a great way to put it. You’ve taught your daughter financial control—the ability to resist our achievement-oriented society’s relentless bombardment of enticing “things” to buy. They may make you feel good for a while, but enduring feelings of wellness—financial as well as psychological—must start from the family environment.
I love your last paragraph! The S&P report should convince every investor of the value of indexing — and yet (shock, shock) it somehow hasn’t.
I’ve had too many former lives—aspiring sports writer, academic and financial advisor. What was I thinking at the last stop? I was a renegade, a misfit, a fairly honest guy in a den of predators. I often wonder how you survived the button-down mentality at the WSJ for so long.