Graphic: Active U.S. equity falls short
Passive U.S. equity mutual funds have become increasingly popular, outpacing their active counterparts in asset growth. The five largest passive funds saw defined contribution assets grow by about 57% over the past five years ended June 30 to $335.2 billion, while the five largest active funds fell by more than 8% to $156.4 billion. And most of the largest passive U.S. equity mutual funds outperformed active funds on an absolute and risk-adjusted basis.
Index outperformance: The five largest active funds’ performance largely failed to keep up with the Fidelity 500 index fund’s return, the largest mutual fund in DC plans. Over the past 10 years,** the Vanguard PRIMECAP Fund Admiral Shares was the exception with a 13.4% annualized return, handily outperforming the Fidelity 500 fund’s 12.2%.
Index returns
Passive momentum: Among the largest U.S. equity mutual funds held by DC plans, 11 passive funds saw assets grow 50% over the past five years.* During that span, 30 active funds’ assets fell by about 2%.
Growth in DC mutual fund assets, by type
Risky business: The five active funds underperformed the largest passive fund on a risk-reward basis over the past five years.** Their higher volatility and lower returns resulted in lower Sharpe ratios. The active funds also produced negative alpha, a measure of excess performance vs. the benchmark.
Five-year Sharpe ratios
Flows favor passive: Annual flows to passive U.S. equity mutual funds have been higher since 2005. Last year, passive funds’ inflows were $46.6 billion, compared with $253.7 billion of outflows from active funds.
Mutual fund flows (billions)
*As of June 30. **Period ended Feb. 28. Sources: Pensions & Investments, Bloomberg LP, Morningstar Inc.
Sponsored
White Papers
Sponsored Content
Partner Content