professional fund managers in 2021: continuing underperformance

The Wall Street Journal published an article yesterday reporting on the 2021 investment performance of actively managed funds, both traditional mutual funds and etfs, focused on the US stock market. Their median return was +22.5%. As far as I can tell, this figure is a total return (meaning including a dividend yield of about 1,3%), and after management fees and expenses. In today’s world, the dividend yield and fees more or less cancel one another out, so for a rough-and-ready assessment, the headline number for fund performance is comparable to the capital changes performance of the index. The latter is what I use on my Keeping Score page.

The S&P 500 capital changes return for 2021 was 26.9%. In other words, the average fund underperformed the S&P by about 4.5% last year. My impression is that this is an unusually weak performance by active managers, but my quick Google search to try to confirm this turned up a ton of ads and no information other than that active funds were crushed during the first half of 2020. The figures I’m familiar with show that only about 10% of active managers are able to match the S&P performance after fees and expenses.

Despite their history of ineptitude, active funds collected $113.1 billion in new assets last year. Somewhat stranger, to my mind, international funds, which give one exposure to the senescent economies of Japan and Europe, took in $193.2 billion. To me, the oddest of all is that bond funds added $587.1 billion in new money. That’s even though the Lipper universe of intermediate-term bond funds lost -1.3% in 2021 and will likely be in the red again in 2022 as interest rates rise.

The most intriguing question to me is not why investors continue to pour money into underperforming vehicles, but who the outperformers are. It’s certainly not hedge funds, whose last period of outstripping more conventional investing came close to two decades ago. Some money clearly goes to brokerage intermediaries. But can that amount to 4%+ of assets? My guess is no. This seems to imply that the big net winners are people like you and me.

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