In the first half of 2015, investors pulled $22 billion out of large-cap core U.S. equity mutual funds, but added $19 billion to S&P 500 Index-linked mutual funds. While this confirms that active management is losing share to passive, we think there are still strong active large-cap mutual funds to choose from.
According to S&P Dow Jones Indices, just 23% of all large-cap core active funds outperformed the S&P 500 Index in the three-year period ended 2014. On an equal-weighted basis, the average large-cap fund’s 18.6% three-year annualized return lagged the S&P 500 index by approximately 180 basis points. These performance challenges are not rare, as just twice in the past ten calendar years more than 50% of actively managed funds have beaten the “500”.
A separate S&P Dow Jones study revealed how hard it is for those large-cap funds that outperformed to continue to do so. Indeed, just 4.5% of the outperformers in the 12-month period ended March 2011 maintained their top-half ranking in each of the four subsequent 12-month periods.
For many investors, the data is compelling enough to encourage them to transition to the passive funds tied to the S&P 500 Index. For example, Vanguard S&P 500 ETF Shares (VOO 190 Overweight) added $4.8 billion of fresh money in the first half, while the mutual fund version, Vanguard 500 Index (VFINX 191 *****) (VFIAX 191 *****) gathered $5.5 billion. Both VFIAX and VOO have extremely low 0.05% expense ratios, which are appealing to S&P Capital IQ.
The S&P Dow Jones Indices studies highlight that you would be better off with an index-based large-cap offering than choosing an average active fund. In fact there are many below-average performers.
For example, Davis New York Venture Fund (NYVTX) is among the biggest large-cap core funds, yet it lagged peers in four of the five last five calendar years. Indeed, NYVTX and its sister share classes had $2.8 billion of outflows in the first half of 2015.
Of course, nobody aims to invest in a below-average mutual fund.
S&P Capital IQ’s mutual fund rankings incorporate holdings-based analysis as well as a review of a fund’s relative track record and cost factors. We find 30 large-cap funds meet our criteria, though some of multiple share classes of the same portfolio.
The list of funds included American Century Equity Growth Fund (BEQGX), Fidelity Fund (FFIDX) and T Rowe Price Growth & Income Fund (PRGIX), Vanguard Growth & Income Fund (VNQPX).
S&P Capital IQ is hosting a client webinar on active versus passive strategies on Tuesday, August 4 at 2pm ET. I will be joined by Aye Soe from S&P Dow Jones Indices. To register please visit here or email email@example.com Reports on the aforementioned mutual funds and ETFs can be found on MarketScope Advisor.
S&P Capital IQ operates independently from S&P Dow Jones Indices.