Brendan Conway picks up on three basic truths about the State of Active Management from a paper by Smead Capital director of research Tony Scherrer. There are three reasons why the modern actively managed mutual funds suck, according to the research:
1. Benchmark-hugging has now grown into such a large phenomenon that, when combined with traditional index funds, it accounts for 50% of the total fund industry’s assets. Funds that demonstrate so-called active share and genuinely buck the benchmarks are growing increasingly rare with every passing year.
2. Modern fund managers are trading way to often. Portfolio turnover seems to be rising each year and is now approaching an average of 100%. They’re watching too much Fast Money? They think that somehow doing something is better than doing nothing because it demonstrates how hard they’re working?
3. Trading costs are too high, too. What comes along with lots of trading is lots of trading costs. Scherrer puts the annual cost at around 1.4% (average) to 2.59% for small cap managers, which really takes a chunk out returns.
Read more on the subject and see some great charts at Barron’s below…