Mark Hulbert discusses an interesting trend in his latest column at MarketWatch (hat tip: Abnormal Returns). Over the past decade, the percentage of U.S. mutual fund assets that are actively managed has been shrinking at a brisk pace.
According to numbers that Mr. Hulbert picked up from a Morningstar report, 89 per cent of mutual fund assets were actively managed in 1999; by 2009, that share had dropped to 78 per cent, thanks in part to the rising popularity of passively managed exchange traded funds. (ETFs are also growing in popularity in Canada, so presumably the trend can be seen here, too.)
For Mr. Hulbert, this raises an issue: If more investment dollars are passively tracking an index, such as the S&P 500, is the index becoming easier for actively managed funds to beat?
“The markets’ much-vaunted efficiency comes from so many investors trying to do better than simply buying and holding,” Mr. Hulbert said. “That means, ironically, that in a world in which everyone is invested in an index fund, the market would be quite easy to beat.”
His conclusion: The market is still a tough hurdle to clear. For one, actively managed dollars still dwarf passively managed dollars by a ratio of 6:1.7. That is, there are $6-trillion (U.S.) of the former, against $1.7-trillion of the latter.
The other problem: Active money managers may have a smaller market share today than they did a decade ago, but they trade stocks far more aggressively these days. This means that the greater amount of money swirling around the market cancels out the rising amount of money that’s just sitting there.
“My three decades of tracking investment advisers has shown that, over long periods of time, about one out of five advisers are able to do better than simply buying and holding an index fund. While that means it isn’t impossible to outperform the market over the long term, the odds are stacked against us,” Mr. Hulbert said.
“And, unfortunately, despite the tantalizing possibility that the last decade’s trends might have lessened those odds that are against us, they most likely remain every bit as steep.”
