Active Equity Management, 1991-2020

Abstract

Using data from Morningstar and Mercer, we examine returns from 1991 to 2020 for the main equity categories of actively-managed US-domiciled mutual funds and institutional strategies.

In the US equity categories, average mutual fund gross returns do not exceed benchmark returns. These results hold measured against a variety of benchmarks available at the time, and also hold during market downturns.

International equity mutual fund gross returns exceed benchmark returns by 3-4% annually in the 1990’s but diminish considerably in the next two decades when, net of expenses, size-weighted average fund returns slightly exceed the largest index funds’ net returns but median fund returns slightly trail them. International funds’ outsized 1990’s results seem very likely due to two rare market events, along with a benchmark that systematically overstates Japanese stocks’ investable weight in that decade.

Institutional strategies fare better than mutual funds across the entire period but this difference is most pronounced in the 1990’s, when their data also contains a known survivor bias. The 2001-2020 institutional results diminish significantly and in four of the six categories, including US LargeCap Equities, are not meaningfully different than benchmark returns.

Performance persistence among high-performing mutual funds and institutional strategies over 3-, 4-, and 5-year periods is essentially absent. Funds in the prior period’s top quartile inhabit the next period’s top half of returns less frequently than they do its bottom half, by a sizeable margin. They also fail to enter the next period’s top half of returns more frequently than funds with bottom-quartile prior returns, though some of this is due to the latter group’s much higher attrition rate.

Together, our results paint a picture of a stock market that in most periods and categories is very efficient and in which active management’s benefits are commensurately modest.

Keywords: Active Equity Management

JEL Classification: G10, G11