essays pieces of the puzzle
Monday, September 17th, 2012
less active

Morningstar published a piece today about three mutual funds that were “getting less active” than they had been.  It comes to that conclusion by way of its calculation of “active share,” a measure of the degree to which supposedly active managers really are so.  I wrote an essay about the concept in 2010.

The performance for each fund is shown above relative to its benchmark since 1995.  They are Vanguard Growth & Income (VQNPX), USAA Aggressive Growth (USAUX), and Neuberger Berman Large Cap Value (NPRTX).  In each graph, when the line is moving up, the fund is outperforming its benchmark, and when it is falling the fund is lagging.  You can see that each (like most active managers) trailed over the long term.

The first thing to note is that the scales of the graphs are not comparable.  The funds were much different in their relative volatilities versus their benchmarks.

Interestingly, two of the funds went to multiple subadvisors over the last couple of years.  The other fund got a new manager, who has much smaller differences versus the index weights than his predecessor had.

The big questions for the mutual fund complexes are those being asked more and more by clients:  1) Why pay for active management if you don’t get outperformance?  2) Why pay for active management if the managers aren’t really trying to be very active at all?

Good questions indeed.  The industry needs to figure out some answers.  (Chart:  Bloomberg terminal.)

If you missed yesterday’s pix, check out the chart of the high yield market.