More and more investors are starting to think that all active mutual fund managers should be avoided. Can any consistently outperform passive indexes?
That's a question raised by a study from T. Rowe Price, the big Baltimore-based fund shop that prides itself on skilled stock research.
The question is timely. Investors yanked $67.1 billion out of stock funds this year through June 30, according to the Investment Company Institute. In the same period, they stuffed $18.6 billion more into shares of newly issued ETFs -- which are mainly passively run -- than they redeemed.
But the T. Rowe Price study found that 18 of its actively managed U.S. diversified stock mutual funds outperformed over rolling 1-, 3-, 5- and 10-year periods during the 20 years that ended Dec. 31 or since inception by funds that didn't exist for the full two decades.
"On average, the funds included in the study generated positive excess returns, net of fees, vs. their designated benchmarks over rolling 1-, 3-, 5- and 10-year periods," T. Rowe Price said in a report.
The longer the rolling periods, the more likely that funds would outperform their bogeys.
For 15 of the 18 funds, five-year annualized excess returns compared with their benchmarks were higher on average than one-year average excess returns.
"We attribute the value we have been able to create for our U.S. equity clients to the strengths of our underlying investment process and research platform, which we believe match many of the characteristics linked to active management success," the report said.
Thirteen of the 18 funds outperformed in more than 50% of the rolling three-year periods. Sixteen outperformed in more than 50% of the five-year spans. And 15 outperformed in more than half of the 10-year slices.
Nine of the 18 outperformed over every 10-year period. Two others outperformed in 99% of their rolling 10-year periods.
Price also found outperformance when it analyzed returns based on market capitalization sizes.
For example, its U.S. small-cap funds outperformed their benchmarks in 100% of their rolling 10-year periods. Midcap portfolios did it in 85% of 10-year segments. And large-cap funds did it in 81% of them.
Small-cap funds outperformed on average by 2.08 percentage points a year over rolling 10-year periods. Midcap funds topped their benchmarks by an average of 1.91 percentage points a year. And small-cap funds beat their bogeys by 1.27 points annually on average.
T. Rowe Price has two additional such funds, which it excluded from the number crunching. The $307.6 million U.S. Large-Cap Core Fund (TRULX) was not included as it only opened in June 2009. Price spokeswoman Lara Naylor said the firm felt that the fund's record was too brief for inclusion. And $228 million Tax-Efficient Equity's (PREFX) after-tax return objective makes it an inappropriate comparison with taxable benchmarks.
The Price study cautions that performance averages could be distorted by the fact that six of the 18 funds did not have full 20-year histories.
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