By using two simple, objective filters—mutual funds with lower fees from the five largest fund families by assets—the average actively managed U.S. large-cap equity fund outperformed its benchmark in 2015, after fees, by 0.70% (or 70 basis points), according to new research by Fidelity Investments.
The research report, “Some Active Funds Rise Above a Tough Year,” says this same subset of funds also outperformed their benchmarks by 0.18% per year from 1992 through 2015, while the average subset of passive index fund slightly trailed its benchmark by 0.04%. While 0.18% per year of outperformance may not seem like a lot, Fidelity says, this may translate to more money to spend, or a longer and more secure retirement.
As a hypothetical illustration, suppose a retirement investor saves $5,000 per year in two different accounts, one with 0.18% of annual excess return and one with –0.04% of annual excess return (assuming returns are net of fees and a constant “benchmark” return of 7%). At the end of 40 years, the balance for the account with 0.18% of excess return would be more than $64,000 higher than the other account, essentially earning an additional 6% of cumulative return.
“We believe that market outperformance—through the compounding of returns—can help shareholders increase their ability to achieve their most important financial goals,” says Timothy Cohen, chief investment officer at Fidelity Investments. “Excess returns can be an important driver of wealth creation, and actively managed funds offer you the opportunity to outperform the market.”NEXT: Long-term results
Although past performance is no guarantee of future results, these filters have been remarkably consistent in identifying sets of funds with above-average relative performance over time. For rolling three-year returns, the average actively managed fund selected by both filters beat the industry average a full 98% of the time from 1992 through 2015. In addition, a statistical test indicates one can be 99% certain that the historical long-term outperformance of the filtered average fund relative to the industry is significant.
Fidelity’s research also reveals that in the other largest equity fund categories (international large cap and U.S. small cap) active managers had a better record of outperforming their benchmarks, even without applying the two simple filters. Actively managed international large-cap funds outperformed their benchmarks by 0.85% per year and U.S. small-cap funds outperformed their benchmarks by 0.99% per year.
“Industry-wide averages can be misleading, and may be doing investors a disservice by giving them the perception that all active funds cannot outperform passive funds, which is simply not true,” says Cohen. “We believe the results of applying certain straightforward and objective filters can be a helpful starting point for investors seeking to identify above-average actively managed equity funds that beat their benchmarks.”The report can be viewed here.