Active management under pressure as US funds underperform

Mike HealeThe alpha from active funds management was a massive -1.2 per cent before fees for US funds in 2008, a figure eight times below the average of 15 bps over 18 years, according to research by CEM Benchmarking.

Mike Heale, partner at CEM Benchmarking, said 2008 was a very bad year in many respects, including the contribution from active management.

On average he said the 156 US funds on the CEM database returned -24.6 per cent, with -23.4 per cent due to the asset mix, and -1.2 per cent from active management.

“This is one of the worst years over the 18 years we have been collecting data,” Heale said.  “And if costs of active management are included then the contribution was -1.7 per cent.”

What adds more significance to the result is that during the last major equity market downturn in the early 2000s, the effect was the opposite, with active management adding significant value.

According to Heale, across the entire database, there has been a significant increase in the use of active management in the past 10 years, with passive management decreasing from 25 to 21 per cent in that time.

In addition to large negative returns in 2008, costs continue to trend higher.

On the CEM database, total fund costs for 2008 were 42 bps, up from 37 bps the year before.

“This is quite a big increase. Underpinning it has been a move towards more expensive asset classes such as private equity and hedge funds, and a move towards external active management which is more expensive by far. But there has also been a trend which is specific to 2008 which was a 25 per cent tumble in assets which meant economies of scale were lost.”

Despite this 2008 effect, total costs are trending up. In 1999 total fund costs were 27 bps and in 2008 they were 42 bps.

According to Heale the longer term implications of the 2008 trends will be more of a focus on plan design and funding.

CEM’s global database includes more than 500 public and private sector funds from Australia, Canada, Europe, New Zealand and the US, with assets ranging from $100 million to more than $408 billion in size and represents nearly $6 trillion in total assets.

Its US database analyses 156 funds, with a total of $1.8 trillion in assets, and a median asset size of $3 billion and an average of $11.3 billion.