The Worst Year for Active Stockpickers in Three Decades

A continuing theme on this site for the last few years has been the futility of hiring stockpicking managers – especially in a mutual fund wrapper – and paying extra fees for their skills. It’s not that stockpickers aren’t smart or talented or hardworking or well-meaning. It’s that they cannot do what they profess to do on a consistent enough basis to justify the extra trading costs, management fees or tax ramifactions. This has been proven time and again by Morningstar ranking fails, the SPDJ Indices “persistence” studies and other ongoing research efforts.

According to Lipper, 2014 has shaped up to be the worst year in modern history for active stockpicking fund managers, with 85% of them failing to beat their benchmarks! It’s almost unbelievable. Imagine if only 15% of the autos sold by car companies didn’t drive. Imagine if airlines only got 15% of their flights to the destination on time. This is a massive fail for the investment management industry.

Reuters:

Some long-term advocates of active management may be turned off by the results, especially considering the funds’ higher fees. Through Oct. 31, index stock funds and exchange traded funds have pulled in $206.2 billion in net deposits.

Actively managed funds, a much larger universe, took in a much smaller $35.6 billion, sharply down from the $162 billion taken in during 2013, their first year of net inflows since 2007…

Derek Holman of EP Wealth Advisors, in Torrance, California, which manages about $1.8 billion, said his firm recently moved $130 million from a pair of active large cap funds into ETFs, saying it would save clients about $650,000 in fees per year.

So now what? Do active funds have a future? They could, if two conditions are met:

1. Management fees need to be cut in half. The average actively managed mutual fund in the US charges investors 1.35%, which is a joke in light of their efficacy in the aggregate.

2. Competition needs to walk away. So long as there are hundreds of thousands of CFAs all trying to do the same thing, the market will remain too efficient leading to too little alpha to go around. But who’s going to throw in the towel? No one until condition 1 really starts to happen.