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More passive-aggressive behavior

Todd Rosenbluth is directorof exchange-traded fund and mutual fund research at S&P Global MarketIntelligence. The S&P Global Market Intelligence rankings for ETFs andmutual funds, available through MarketScope Advisor, are quantitatively derivedand based on performance, risks, costs and a qualitative analysis of theunderlying holdings.

Asthe S&P 500 Index survived the turmoil of the first quarter and climbedtoward an all-time high in the second quarter, investors preferred replicatingthe broader stock market instead of seeking to outperform it with activelymanaged funds. According to Thomson Reuters Lipper, mutual funds that passivelytrack the performance of the S&P 500 pulled in $12.27 billion of net clientflows in the first half of the year, while the actively managed large-cap coremutual fund peer group faced $25.77 billion of net redemptions.

Lipper'sU.S. large-cap core equity funds typically have average characteristics, suchas market capitalization, comparable to the S&P 500, but managers haveinvestment discretion. The research and analysis required to try to top and/orsmooth the returns of the benchmark leads to higher expense ratios compared topassively managed index products.

Inpart because of those higher expenses, the majority of active mutual fundsunderperform their benchmarks, based on researchfrom S&P Dow Jones Indices. In 2015, only 26% of large-cap core fundsoutperformed the S&P 500 — 2007 was the last year that the majority of theactive large-cap core universe exceeded the benchmark. Following chronicunderperformance as a group, the large-cap core funds have suffered monthlyoutflows since November 2014, including $5.05 billion in June.

 

Amongthe 10 large-cap core funds with the most assets, Fidelity Series All-SectorEquity Fund (FSAEX) experienced the most outflows in June at $334.2 million.FSAEX's expense ratio of 0.73% is higher than that of passive funds, and itsreturn of 2.54% lagged the S&P 500 by 130 basis points. Similar to manylarge-cap funds, one of FSAEX's top holdings is But in contrast to itspeers, the fund held a top-five position in Capital One Financial Corp. as of June 30.

Juneoutflows were more modest at a few other sizable large-cap core funds. JPMorganU.S. Equity Fund (JUEMX) shed only $11.8 million last month. Wells Fargo andChubb Ltd. were top 10positions at June 30.

Afterexperiencing net inflows through May, American Funds Washington MutualInvestors Fund (AWSHX), the largest large-cap core mutual fund, lost $34.0million of assets in June. JPMorganChase & Co. was the 11th-largest equity position at June 30.

DavisNew York Venture Fund (NYVTX)'s $1.53 billion in net redemptions in the firsthalf of 2016 was second only to Oakmark Fund (OAKMX)'s $1.91 billion. The Davisoffering, however, performed worse, declining 0.87% in an up-market forlarge-cap stocks. Financial stocks comprised 29% of the fund's assets as ofApril 30. Top 10 holdings included Berkshire Hathaway Inc., , JPMorgan andAmerican Express Co.

Investors'preference for lower-cost products has accelerated even ahead of implementationof the Department of Labor fiduciary standards, which could encourage advisers toshift to passive funds, including those tied to the S&P 500 Index.Mutual funds tracking the S&P 500 have accumulated net inflows for 22 ofthe past 24 months, including $3.03 billion in June.

Vanguard500 Index Fund (VFIAX) has been the biggest beneficiary thus far in 2016,attracting $7.31 billion of new money, with more than half of the total addedin June alone. The fund's largest share class has a 0.05% expense ratio.

Fidelity500 Index Fund (FUSVX) was second in asset gathering for both June and thefirst half of 2016, pulling in $743.2 million and $3.09 billion, respectively.Last month, Fidelity announced expense cuts for several of its index mutual funds.

Click here for an Excel file with large-cap mutual fund data.

Click here for a template to view asset manager peer comparisons.

 

 

 

 

S&P Global MarketIntelligence operates independently from S&P Dow Jones Indices.