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Bulls drive the gap between equity and bonds

The gap between active equity and core bond managers over the past five years widened significantly relative to the trailing five-year period ended 2012, a half-decade that experienced both the global financial crisis and its subsequent recovery.

The median annualized return for large- and small-cap equity funds was 15.6% and 15.2%, respectively, while the median active core bond fund was about 2.3% over the five-year period ended Dec. 31, 2017. Despite some periods of volatility, the latter five-year period was very risk-on as the S&P 500 index was up 15.8% on an annualized basis. Interquartile ranges were tighter over the span as well relative to the five years ended Dec. 31, 2012, when the S&P 500 was up 1.7% on an annualized basis.

Narrower spreads between the best- and worst-performing managers and relatively higher index returns make it harder for active managers to differentiate themselves from their peers. It also weakens their argument against passive investing.