Can active investment managers beat the market?
Less than 10% of active large-cap fund managers have outperformed the S&P 500 over the last 15 years. The biggest drag on investment returns is unavoidable, but you can minimize it if you're smart. Here's what to look for when choosing a simple investment that can beat the Wall Street pros.
According to extensive research, a staggering 94% of active fund managers do not beat the market. It's an inconvenient truth that even financial titans like Warren Buffett's Berkshire have now underperformed the S&P 500 over a 20-year period.
In U.S. large cap core, a category with 500-plus asset managers, only 23% of managers outperformed their benchmarks. U.S. large cap growth was even worse: 18% of active managers outperformed. To be sure, the data changes over different five-year periods.
A significant portion of actively managed mutual funds failed to outperform their benchmark indexes in 2023, , according to SPIVA Year-End 2023 report.A whopping 74 per cent of actively managed mid and small-cap funds underperformed their benchmarks.
It is relatively common to beat the market for 1–3 years at a time. That can largely be explained by luck. But the data clearly shows that even professional fund managers are unable to beat the market consistently over a longer period of time, like 10–15 years.
Berkshire Hathaway's CEO, Warren Buffett, widely considered to be the most successful investor alive today, has merely matched the market's return over the past two decades. The fundamental question this raises for investors is how long we should give a manager the benefit of the doubt when failing to beat the market.
(NASDAQ:DXCM) and Medpace Holdings, Inc. (NASDAQ:MEDP) are the only two healthcare sector companies that have made it onto our list of 13 stocks that outperform the S&P 500 every year for the last 5 years. The shares of DexCom, Inc.
And over a full 20-year period ending last December, fewer than 10 percent of active U.S. stock funds managed to beat their benchmarks.
Active managers outperformed their respective indexes after fees more than half the time in all nine categories, with managers in seven categories beating the index in at least 65% of the 121 measurement periods.
In general, actively managed funds have failed to survive and beat their benchmarks, especially over longer time horizons. Just one out of every four active funds topped the average of passive rivals over the 10-year period ended June 2023. But success rates vary across categories.
Why do active managers underperform?
Another driver of the underperformance of active funds, according to McDermott, is fees: “All funds have years where they underperform, however, the longer-term evidence is undeniable that active managers have continued to struggle. The main reason for this underperformance is because active funds charge higher fees.”
Actively managed funds can add value to your portfolio because they offer an opportunity for outperformance. But be mindful—there's also the possibility they may underperform.
| Fund | 2023 performance (%) | 5yr performance (%) |
|---|---|---|
| MS INVF US Insight | 52.26 | 34.65 |
| Sands Capital US Select Growth Fund | 51.3 | 76.97 |
| Natixis Loomis Sayles US Growth Equity | 49.56 | 111.67 |
| T. Rowe Price US Blue Chip Equity | 49.54 | 81.57 |
Last year hedge funds beat the market. The Barclays Hedge Fund Index, which measures returns across the industry, net of fees, lost a mere 8%, while the s&p 500 lost a more uncomfortable 18%.
The Legendary Investors
Warren Buffett, for example, has produced a 20.9 percent annualized return over fifty-three years. Peter Lynch of Fidelity returned 29 percent over thirteen years. And Yale's David Swensen has returned 13.5 percent over thirty-three years.
So he was always saving money, turning off the lights and turning off the water around the house even after he was in Hollywood and making a lot of money. Narrator: Of all the Marx brothers, Groucho was the most financially conservative. In 1929, he took his life's savings and put it in a sure thing, the stock market.
Ten Year Stock Price Total Return for Berkshire Hathaway is calculated as follows: Last Close Price [ 418.62 ] / Adj Prior Close Price [ 123.13 ] (-) 1 (=) Total Return [ 240.0% ] Prior price dividend adjustment factor is 1.00.
Less than 10% of active large-cap fund managers have outperformed the S&P 500 over the last 15 years. The biggest drag on investment returns is unavoidable, but you can minimize it if you're smart. Here's what to look for when choosing a simple investment that can beat the Wall Street pros.
Since Buffett took control of Berkshire Hathaway in 1965, the stock has trounced the S&P 500. Its compound annual gain through 2023 was 19.8% versus 10.2% for the broader index. But Buffett says those days of market-trouncing returns are behind it.
According to our calculations, a $1000 investment made in February 2014 would be worth $5,971.20, or a gain of 497.12%, as of February 5, 2024, and this return excludes dividends but includes price increases. Compare this to the S&P 500's rally of 178.17% and gold's return of 55.50% over the same time frame.
How much money was $1000 invested in the S&P 500 in 1980?
In 1980, had you invested a mere $1,000 in what went on to become the top-performing stock of S&P 500 (^GSPC 0.74%), then you would be sitting on a cool $1.2 million today. That equates to a total return of 120,936%.
- High-yield savings accounts.
- Money market funds.
- Short-term certificates of deposit.
- Series I savings bonds.
- Treasury bills, notes, bonds and TIPS.
- Corporate bonds.
- Dividend-paying stocks.
- Preferred stocks.
For example, when the market is volatile or the economy is weakening, active managers may outperform more often than when it is not. Conversely, when specific securities within the market are moving in unison or equity valuations are more uniform, passive strategies may be the better way to go.
Index funds may be more suitable for certain market segments and industry sectors, where lower cost works to investors' advantage. Actively managed mutual funds may be suitable for market segments where the fund managers have a higher potential of generating alphas for investors.
The empirical evidence suggests that the odds are against active fund managers when it comes to outperforming the market. It is not a game of chance or superior skill, but rather a confluence of market conditions, investor sentiment, and the inherent inefficiency of the stock picking process.
