About a year and a half ago the company I work for closed down their 401K and I rolled it over to an IRA. My wife recommended that I talk to her Schwab advisor and he recommended two nice mutual funds, Buffalo Flexible Income(BUFBX) and Yacktman Focused Service(YAFFX). At first glance they both looked good since Morningstar gave one of them four stars and the other five stars. Being the analytical guy I went over to Yahoo finance and compared them to S&P 500. I was not impressed so I decided to look at ETF alternatives. I ended up settling on an ETF that focused on U. S. Stock companies with dividends, SCHD. It not only had better performance over the last year than the two mutual funds but it had lower transaction costs and a lower initial investment requirement. I decided I would look at those mutual funds again in about six months.
Six months later I am watching Consuelo Mack’s Wealthtrack and one of her guests is making a strong argument that a fundamentally weighted index fund he created for Schwab was the better mousetrap when it comes to maximizing index fund performance. So I compared his fund(FNDX), the dividend fund(SCHD), and the mutual funds recommended to me to the S&P 500. The S&P 500 and FNDX were tied and SCHD was not far behind. I found it interesting that the mutual funds were still doing poorly.
Last month my son came home for Christmas and complained that his mutual fund lost money. About the middle of last year he set up a Roth IRA and started investing monthly in a moderately conservative mutual fund from USAA(UCMCX). Despite a four star rating from Morningstar he had lost money. The irony of a conservative investment losing money in a good market had me chuckling. So I did a what-if simulation of him buying Buffalo Flexible Income instead and found that he would of lost money, too. I was beginning to see the trend. Passive investing trounced active stock pickers in 2014 and the money was flowing out of active funds into passive funds. A couple of days later my suspicions were confirmed when I read this article, Mutual Funds: Why Vanguard Won 2014, and What That Means for 2015.
As the S&P 500 index climbed to one record after another last year, the vast majority of mutual fund managers actively picking stocks to try to beat the market fared very, very poorly. Among the 1,417 large-cap growth managers that Morningstar tracks, only 171, or about 12 percent, managed to beat the 13.7 percent total return of the S&P 500 for the year.
I do not know if active stock pickers can catch up to passive investors in 2015 but it they do not, there will be a lot less of them in this business by the end of the year.