Good News for Managed Funds?

It’s been a tough year, decade, lifetime for managed stock funds.  A managed stock fund is one where the manager guesses which stocks will be most profitable even though all other fund managers have the same information he does.
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What have managed funds had to put up with?

• The Department of Labor’s new requirement that financial advisors act in the best interests of their client  The old rule was, essentially, recommend anything that isn’t too horrible.  By apparent coincidence, advisors tended to recommend funds with higher than average commissions.  The new rule is changing the industry by redirecting investors to low cost funds that average a significantly better return.
• Massive outflows from actively managed funds to indexed funds.  In 2015 investors pulled $207 billion from active funds and put twice that, or  $414 billion into low cost index funds.
• Academics continue to have a field day.  Monevator points out that active Investing Is a Zero Sum Game.  For every winner in active funds, there must be a loser–much less cheerful than the fact that a passive index fund delivers you your fair share of the profits,   It’s Never a Stock Picker’s Market highlights studies indicating that it’s probably never a good idea to pursue active management.
• Active Management is worse than random picks.  It’s actually a lot worse than that as huge numbers of mutual funds with bad track records are merged and hidden from the data.  Active Funds Fail Again & Again points out that “smart” fund managers turn out to be just lucky, as they have a strong tendency to underperform the very next year.

Finally, some Good News for Managed Funds:

• Active Managers have invented some new terms, “Active Index Fund” and “Enhanced Index Fund“.  They point out that you can have the advantages of indexing (lower cost, better returns) with the advantages of active management (benefits include…giving the active manager more of your money for his less than 50/50 guesses).  Still, this should be a win for the active managers, as some people will get confused and think they’re buying an index.
• American Funds argues that active managers with low expenses and high manager ownership do much better.  Specifically, they did 3% better than the index (rolling 1 year returns over the two decades through 2015).  I’m not ready to flock to the stock picking gurus just yet though.  I wonder how the numbers look if 1) other time periods are used, and 2) funds that did so badly they had to be terminated are also considered.