Active Wins ... If You're Big and Cheap
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Friday, May 15, 2015

Active Wins ... If You're Big and Cheap

Active fundsters, it's time to play good news, bad news with John Rekenthaler. His good news for you is that new research shows active management beating passive. The bad news is the qualifier: only if you're big and cheap.

In his latest "Rekenthaler Report" column, the Morningstar guru weighs in on new research from Fidelity [profile] on the active vs passive management debate. (Read the full report, "U.S. Large-Cap Equity: Can Simple Filters Help Investors Find Better-Performing Actively Managed Funds?" here.) The research, and Rekenthaler's take on it, may be comforting to active equity fundsters who work for the biggest shops in the business, but fundsters at other shops may find it all to be cold comfort.

Fidelity found that, over the last 23 years, actively-managed U.S. small cap equity funds and international large cap equity funds outperformed their benchmarks, on average, by 1.11 percent and 0.86 percent each, respectively. U.S. large cap equity funds underperformed, on average by 0.67 percent, thanks to their fees. But wait: when Fidelity controlled for size (being run by one of the five biggest active large-cap managers) and cost (being in the bottom quartile of fees), active U.S. large cap equity funds outperformed their benchmarks and their indexed brethren. So, if you're really big, and if your fees are low -- i.e. if you're Fidelity, Capital Group, or Vanguard, or someone in that neighborhood -- you can actively outperform the market and the indexers. But if you're not big, good luck ...

Oh, and yes, this is Fidelity research that ends up vindicating firms like, say, Fidelity, but Rekenthaler judges the study to be fair.

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